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Good afternoon [subscriber:firstname | default:Subscriber]!
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The purpose of Macro Pakistani is not to deliver the breaking news. The problem I faced, as a reader in Pakistan, was not just fake news – it was too much of the same news. So here, our purpose will be to not chase the news and miss the story. What we want to deliver to our subscribers is an understanding of the country that is impartial, data-driven and as simple as possible. Feel free to reach out every time you feel we are falling short of doing that.
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What will be the impact of COVID-19 on Pakistan’s economy?
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Before we talk about the impact of the pandemic, let’s discuss what it takes for an economy to produce and supply goods and services:
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Labor (L): In order to produce goods and services, you need workers that provide effort.
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Capital (K): In most cases, the workers will need to use machinery and/or other inputs that cost money. We denote this Capital with ‘K’ and not ‘C’, because we want to avoid confusion with Consumption (C). Read the previous article to understand what role consumption plays in the GDP.
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Total Factor Productivity (A): You also need to continually innovate and bring in the latest technology by investing in new machinery and production techniques to become more efficient. This improvement in efficiency is total factor productivity.
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Additionally, another definition to help understand the impact of COVID-19:
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Hysteresis: An economy in recession with a lack of investment destroys its ability to grow permanently (even when demand recovers) – labor loses skill if they remain out of work and companies fail to invest in training.
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We weren’t as unhappy in 2008-09
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Source: IMF; Pakistan Bureau of Statistics
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Last time Pakistan experienced a period of falling growth was during the Global Financial Crisis of 2008-09. During that time, Pakistan, like other emerging markets, managed to avoid a recession or a negative real growth rate. Real growth in emerging markets slowed down to positive 3% in 2009 while advanced economies actually had negative 3% growth. According to the IMF, the Great Lockdown will lead to negative growth of 5% across the world with emerging markets suffering by -3% and advanced economies by -8%.
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It is expected to be worse this time around because COVID-19 is not just a supply side shock but also a demand shock. You can read the full details in the complete article but in short, not only can countries not produce goods and services at the same level as before, people’s incomes have dried up and they might not be able to purchase the goods and services you end up producing.
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We will be pretty unhappy in 2020-21
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It took 10 years to recover from the last period of low growth largely due to hysteresis. Since Pakistan has had a recurring lack of investment, its ability to produce goods and services of the same quality, at the same price in the same quantity as pre-COVID levels, might be permanently destroyed.
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Watch the Harvard Business Review explain what shapes economic recovery can have. In 2020, Pakistan’s economy is expected to contract by 0.4%. Next year, the Ministry of Finance is predicting a V shaped recovery with growth of 2.1% while the IMF has a more realistic projection of 1.0%.
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Considering the lack of investment in Pakistan, the slowing down of real growth, the low levels of improvement in labor, capital and total factor productivity - it is just as difficult to see growth not being as low as what the IMF has predicted, as it is hard to believe that recovery will be V-shaped.
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To understand my lack of optimism, compare Pakistan’s investment levels of 15% of GDP to other countries on the right side of the table below:
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Source: Economist Intelligence Unit
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We reap what we sow
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If you remember, consumption in our economy has been growing faster than the GDP growth rate of 5.7% since 1991. Investment on the other hand, has been growing slower. Again, compare us to Bangladesh, which has investment levels more than twice as high as Pakistan’s. As a result, their real capital has increased by 8% vs. our 3%, labor productivity increased by 6.3% vs. our 1.3% and total factor productivity increased by 4.1% vs. our 1.2%.
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Source: Economist Intelligence Unit
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While real time data to predict GDP performance is quite limited, the Large Scale Manufacturing Index, which shows the real growth in select industries in Pakistan, is published on a monthly basis. If you compare the March 2020 figures to March 2019 figures, you will see a contraction of 23%, which starts to paint a pretty bleak outlook. Textile and Food & Beverages industries, which make up the highest shares in the index, contracted by 26% and 21% respectively.
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Not only is manufacturing expected to contract further, since it is the highest tax paying sector in Pakistan, government revenues are expected to decline too. All this while government expenses are supposed to increase with the alleged PKR 1.2 trillion package offered to Naya Pakistan.
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If you want to learn more about how the government doesn’t care for us (fiscal deficit), what the silver lining is (balance of payments) and how Pakistan was already on shaky ground pre-COVID-19, please read the article below.
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Read the full article in the link below
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