Impact of Covid 19 on international Business?

explain it in detail what economic

issues currently facing by Pakistan in international Business? list down the issues
and explain them briefly

Credit Assignment
By
Shiza Abdul Ghani
(16BBA-020)

Business Administration (International Business Management)

Under the supervision of

SIR AMANULLAH PARHYAR

SBBU Business Administration

SHAHEED BENAZIR BHUTTO UNIVERSITY, SANGHAR CAMPUS

Date of the submission

03-July -2020
Contents
Impact of COVID-19 on International business.......................................................................................................3
Modern Diplomacy...................................................................................................................................................4
Even Though huge uncertainty, there are four actions that can be taken now...........................................................7
1. Boost up support in trade and international markets by enhancing comprehensibility..................................7
2. Second, keep global supply chains going, especially for essentials...........................................................8
3. Avoid making things worse.........................................................................................................................11
4. Look beyond the immediate: Policy actions now could have a long life.....................................................13
Firms and governments will need to re-think resilience in global supply chains.........................................14
Doing more on trade and health to be ready for the next time......................................................................15
Decisions on trade matter now, but also for ensuring that trade can help support recovery......................16
II. PAKISTAN’S ECONOMY BEFORE COVID-19........................................................................................17
III. AFTER COVID-19: DIRE PREDICTIONS................................................................................................19
Economic issues currently facing by Pakistan........................................................................................................20
Growth................................................................................................................................................................... 20
Unemployment and Poverty.................................................................................................................................22
Foreign Trade and Balance of Payments............................................................................................................23
Fiscal Balance and Revenue................................................................................................................................24
Trade, Industry and Business..............................................................................................................................25
Energy....................................................................................................................................................................26
Debt........................................................................................................................................................................ 27
IV WEIGHING THE MITIGATION MEASURES............................................................................................29
Government Rescue Package...............................................................................................................................29
State Bank of Pakistan.........................................................................................................................................29
External Debt.........................................................................................................................................................30
V. THE POLITICAL AND STRATEGIC FALLOUT......................................................................................31
VI. CONCLUSION...............................................................................................................................................33
References...............................................................................................................................................................34
Impact of COVID-19 on International business

COVID-19 is a benevolent disaster worldwide. The virus is spreading all over the world, due to this
reason the health system is in huge pressure to fight with it and save the lives of people. This is
affecting harsher and will be more in upcoming days specially under developing and poor countries, not
having very good health systems.

According to OECD Interim Economic Outlook, In the month of March 2020, the downside situation
reduced the worldwide growth to 1.5%. That was optimistic. But in the most current valuations in the
month of June, OECD Economic Outlook indicated an exceptional downfall in the first 6 months of
year 2020. This is – an approximately 13% fall in international GDP (as shown following in Figure 1).
Furthermore, the prices to the international economy from support packages, through central banks and
financial activities, are very large and likely to have long-lasting and complicated impacts on
management of independent and business liability. Although these efforts, many important countries’
economies are now going to down fall, and they cannot overlook a little more severe situation.

A further challenge is the uncertainty about COVID-19, including in terms of the scale and pace of
infection; how long and widespread shutdown measures will prove necessary. Making opportunities for
treatments to identify symptoms essentially. So, the health services can concentrate only on the most
serious cases.

Modern Diplomacy

The outbreak of pandemic Covid-19 all over the world has disturbed the political, social, economic,
religious and financial structures of the whole world. World’s topmost economies such as the US,
China, UK, Germany, France, Italy, Japan and many others are at the verge of collapse. Besides, Stock
Markets around the world have been pounded and oil prices have fallen off a cliff. In just a week 3.3
million Americans applied for unemployment and a week later another 6.6 million people started
searching for jobs. Also, many experts on economic and financial matters have warned about the
worsening condition of global economic and financial structure. Such as Kristalina Georgieva,
Managing Director of International Monitory Fund (IMF), explained that “a recession at least as bad as
during the Global Financial Crisis or worse”. Moreover, Covid-19 is harming the global economy
because the world has been experiencing the most difficult economic situation since World War-II.
When it comes to the human cost of the Coronavirus pandemic it is immeasurable therefore all
countries need to work together with cooperation and coordination to protect the human beings as well
as limit the economic damages. For instance, the lockdown has restricted various businesses such as
travelling to contain the virus consequently this business is coming to an abrupt halt globally.

Keeping in a view the staggering situation G-20 nations called an emergency meeting to discuss
worsening conditions and prepare a strategy to combat Covid-19 as losses could be reduced. The spread
of the epidemic is picking up speed and causing more economic damages. It is stated by the U.S.
official from federal reserves that American unemployment would be 30% and its economy would
shrink by half. As for as the jobs of common people are concerned, there is also a real threat of losing
their jobs because with business shutting down that shows that companies will be unable to pay to
workers resultantly they have to lay off them. While when it comes to the stock market, it is severely
damaged by Covid-19 such as the stock market of the United States is down about thirty percent. By
looking over the existing condition of several businesses, most of the investors are removing its money
from multiple businesses in this regard $83 billion has already removed from emerging markets since
the outbreak of Covid-19. So, the impact of Covid-19 is severe on the economic structure of the world
because people are not spending money resultantly businesses are not getting revenue therefore most of
the businesses are shutting up shops.

It also observed that the economic recovery from this fatal disease is only possible by 2021 because it
has left severe impacts on the global economy and the countries face multiple difficulties to bring it
back in a stable condition. Most of the nations are going through recession and collapse of their
economic structure that points out the staggering conditions for them in this regard almost 80 countries
have already requested International Monetary Fund (IMF) for financial help. Such as Prime Minister
of Pakistan Imran Khan also requested IMF to help Islamabad to fight against Novel Coronavirus.
Furthermore, there is uncertainty and unpredictability concerning the spread of Coronavirus. So, the
Organization for Economic Cooperation and Development (OECD) stated that global growth could be
cut in half to 1.5% in 2020 if the virus continues to spread. Most of the economists have already
predicted about the recession to happen because there is no surety and still no one knows that how for
this pandemic fall and how long the impact would be is still difficult to predict. Besides, Bernard M.
Wolf, professor, Economics Schulich School of Business, said that “it is catastrophic and we have never
seen anything like this, we have a huge portion of the economy and people under lockdown that’s going
to have a huge impact on what can be produced and not produced”.

As Covid-19 has already become a reason for closing the multiple businesses and closure of
supermarkets which seems empty nowadays. Therefore, many economists have fear and predicted that
the pandemic could lead to inflation. For instance, Bloomberg Economics warns that “full-year GDP
growth could fall to zero in a worst-case pandemic scenario”. There are various sectors and economies
that seem most vulnerable because of this pandemic, such as, both the demand and supply have been
affected by the virus, as a result of depressed activity Foreign Direct Investment flows could fall
between 5 to 15 percent. Besides, the most affected sectors have become vulnerable such as tourism and
travel-related industries, hotels, restaurants, sports events, consumer electronics, financial markets,
transportation, and overload of health systems. Diane Swonk, Chief Economist at the Advisory Firm
Grant Thornton, explained that “various nations have multinational companies that operate in the world
because the economy is global. For instance, China has touchpoints into every other economy in the
world, they are part of the global supply chain. So one should shut down production in the U.S. by
shutting down production in China”. Besides, Kristalina Georgieva in a press release suggested that
four things need to be done to fight against Covid-19 and avoid or minimize losses. Firstly, continue
with essential containment measures and support for the health system. Secondly, shield affected people
and firms with large timely targeted fiscal and financial sector measures. Thirdly, reduce stress to the
financial system and avoid con tangent. Fourthly, must plan for recovery and must minimize the
potential scaring effects of the crisis through policy action. Concerning the serious and worsening
conditions all over the world, nations need cooperation and coordination among themselves including
the help and mature as well as sensible behaviour of people to effectively fight against Coronavirus.
Otherwise, because of the globalized and connected world, wrong actions and policies taken by any
state will leave a severe impact on other countries as well. This is not the time of political point-scoring
and fight with each other rather it is high time for states to cooperate, coordinate, and help each other to
defeat this fatal pandemic first for saving the global economic and financial structure.

The COVID-19 is continuing in waves, with countries acceding – and set to improve time to time but, it
is very clear that this virus ant it is after affects will remain with us for certain time. In contrast to this
whole scenario, it is very important to keep trade flowing, for timely supply of the necessary products
and to support for the international economy both. It is most important for the living and surviving.

To be succeed in this we need cooperation and trust of market that will deliver important commodities,
countries should not enforce export limits, and imports do not impact to health consequences. This is a
challenge at a time of trade tensions, where the international trading system was already subject to an
increased number of new restrictions and distortions. Among traders to tariff increases, and support in
major sectors to an important government. Struggle to manage and overcome pressure by negotiations
which are complicated now due to mobility limits. But in the situation of the severe economic burden
from COVID-19, it is more important than ever to avoid acceleration of the current trade pressures.
Figure 1. An extraordinary output crisis is arising in the first half of 2020
Projected change in GDP at constant prices between 2019Q4 and 2020Q2 (per cent)

Note: Data for China refer to the change in output between 2019Q4 and 2020Q1.

Source: OECD Economic Outlook 107 database.

Even Though huge uncertainty, there are four actions that can be taken now

1. Boost up support in trade and international markets by enhancing comprehensibility

A strong, shared, transparent information base is critical in underpinning sound national policy
responses and the international co-operation to keep trade flowing. It will be critical that countries
honor their commitments to notify trade-related measures taken in response to COVID-19 to the World
Trade Organization (WTO). The OECD is revealing the information on business-related country actions
on COVID-19 with WTO colleagues, and assessing the possible effect of these actions to help
assistance policy makers dealing with the crisis.

Building on our annual Monitoring and Evaluation of Agricultural Policies we are tracking and
assessing the impact of country measures in relation to agri-food production and trade in response to
COVID-19. We are bringing this information to AMIS (Agricultural Market Information System),
where we work with other international organizations and governments to ensure accurate, up-to-date
information on market developments and country policies in critical commodities for the global food
system.

2. Second, keep global supply chains going, especially for essentials

The main concern is keeping the key supply chains for basic goods for the crisis – including medical
deliveries, food products and ICT goods and services – open and functioning. However, we are starting
to see a number of challenges to keeping these supply chains going related to the business of trade. For
example

 Cancellation of passenger flights linked to travel bans has limited the availability of air cargo
(Figure 2) while urgent shipping of essential goods has increased demand, resulting in increases in the
price of air cargo (compared to October 2019 air freight costs are up by about 30% between the
People’s Republic of China (hereafter “China”) and North America and by over 60% on some
important Europe-North America routes) (Curran, 2020) Delivery times have also increased.

 Important shipping ports reported year-on-year drops in cargo between 10% and 20% in

February (Baschuk, 2020). Over 50 countries have changed port protocols, ranging from port closure
and quarantine measures to additional documentation requirements and examination. That said, some
countries have also set up “green lanes” at ports of entry and border crossings, to accelerate the
processing of cargo shipments.

 At the time the virus struck, large numbers of shipping containers were in Chinese ports, and
restrictions on their movement have led to a shortage that has seen the price of containers rise (in some
cases considerably), with flow-on effects for the price of cargo, including food products.

 Lockdowns are also impacting the availability of labor to unload ships at ports (notably in

countries where this is less automated) or raised costs due to increased protective measures for workers.

 More generally, all supply chains are being affected by the need to ensure additional health and
safety measures for all participants in the supply chain (which affect costs and time).

 Limits on mobility of people and lockdowns are affecting a variety of trade processes, from
physical inspections of goods for SPS, to testing and certification for TBT, to changing how anti-
dumping investigations are conducted.

All of these are adding to the time and costs of international trade on products that matter. They will
require coordinated action amongst governments – and with the private sector – to find solutions to the
logistical constraints affecting the ability to get essential products where they are needed most.
An immediate issue is facilitating medical supplies necessary to tackle COVID-19, many of which are
produced across a number of countries and for which trade is the means of ensuring global supply. For
example, at the onset of the crisis, China was the main manufacturer of surgical masks, accounting for
about one-half of world capacity. Yet in January, this was not enough to meet demand; China stopped
exporting masks and imported 56 million masks in the first week of January; masks were also donated
to China by some countries. In the midst of the crisis, Chinese demand was estimated at 240 million
masks per day (more than ten times its manufacturing capacity). China increased production from
around 20 million masks per day to around 116 million per day at the end of February and is now
exporting masks to other countries.

Figure 2. Sea and air cargo are dropping sharply

Source: OECD, drawing on data from Innovative Solutions in Maritime Logistics

(www.isl.org/en/containerindex) and International Air Transport Association (www.iata.org).

Keeping the trade in essential medical supplies flowing means removing barriers such as tariffs on
medical goods essential for combatting COVID-19 (e.g. several countries maintain tariffs of up to 10%
on COVID test kits) (Evenett, 2020 [3]) as a number of countries have already done. It means expediting
certification procedures to allow new products to be traded as soon as possible and ensuring that
technical requirements are science-based and do not unnecessarily restrict trade. Finally, it
means enhanced trade facilitation to keep goods moving as quickly as possible – including identifying
key actions needed to ensure smooth customs procedures with limited human intervention (see below).

There are particular issues with keeping food supply chains flowing. In addition to the impacts of
reduced air and sea cargo possibilities, are additional challenges related to the risk of food loss and
waste through delays to handling difficulties, and the sudden collapse in demand from restaurants and
hotels. There is also a need to ensure that food supply flows to quarantined areas, and that appropriate
biosecurity arrangements  are in place, requiring changes to how food is produced, consumed and
distributed – while also ensuring that COVID-19 related sanitary and phytosanitary (SPS) requirements
remain science based and not unnecessarily restrictive. While at present global food markets remain
well-balanced and cereal stocks are high (AMIS, 2020 [4]), it will be important to continue to closely
monitor developments, given accumulating risks such as the lack of seasonal labor for planting and
harvesting crops.

In the short term, there are some practical things we can do to keep trade flowing and to increase how
trade can support the fight against COVID-19, including:

 Speeding up border checks for medical products and food and minimizing the need for physical
interaction between Customs and other border officials and traders at borders, by digitizing processes to
the extent possible. Also, important will be efforts to expedite standard formalities to leave room for
any necessary additional COVID-19 controls. Efforts to boost international co-operation on risk
management will also be important in tackling the virus and facilitating movement of goods, as will
continued assistance for lower income countries.

 Making it cheaper and easier for people to stay connected to jobs, markets – and each other –
by: reducing tariffs on information and communication technology goods and measures affecting access
to digitally enabled services; temporarily increasing de minimis thresholds to cut delays in cross-border
e-commerce; and keeping trade moving without physical contact through enacting regulations to enable
e-payments, e-signatures and e-contracts.

 Helping medical researchers co-operate on COVID-19 through enabling data flows. Access to
detailed health information is critical to finding a cure for COVID-19. Yet health data are often subject
to strict localization requirements and cross-border data flow restrictions. Governments could enable
processing and cross-border transfer of sensitive data to monitor epidemics and promote the use of
restricted access and secure sandboxes to pool health data on COVID-19.

3. Avoid making things worse

There are many unavoidable costs in the current pandemic; all the more reason to avoid actions that add
to costs for traders and consumers. Chief among these is the need to avoid export restrictions on
essential goods, such as medical equipment and, especially, food products. Currently, more than
60 countries have restricted exports of essential goods and increasingly agriculture and food products.

The lesson of the food price crisis of 2007-08 is that export restrictions are a recipe for self-inflicted
harm, undermining food security for everyone. Experience has shown that export restrictions
temporarily lower domestic prices and raise availability, but they also discourage domestic production
and so any benefit tends to be short-lived. Critically, by diverting supplies from world markets, they put
upward pressure on international prices, which harms other countries – in particular those most
dependent on international markets for food. Export restrictions risk undermining confidence in
international markets and can precipitate hoarding and panic buying, further accentuating problems in
import-dependent countries. Ultimately, nobody benefits.

There is currently no supply problem in global agriculture and food markets; indeed, at present, stocks
are strong, and prices look set to stay low. However, if governments engage in export restrictions or if
individuals, firms, or countries engage in panic buying or hoarding there is a risk of creating an
avoidable problem now.

While there is not an immediate threat to global supplies of basic foodstuffs, there is the potential for
specific food supply chains to be severely disrupted, including from lack of seasonal workers for
planting or harvesting key crops, logistics constraints, and additional SPS and technical measures.
Vigilance will be required to ensure that crisis- or policy-induced risk factors do not cause disruptions
in supply, if the containment measures related to COVID-19 are long-lived.

The global market situation for medical supplies is very different; there is a critical need to increase the
overall global supply of essential medical supplies for combatting COVID-19 such as ventilators and
masks. Governments need to invest urgently in boosting production capacity, including in co-operation
with the private sector, for local, regional, and global markets.

Some governments are taking measures designed to ensure supply for their own population that have
the effect of limiting supply for others. Export restrictions often take the form of special licensing
requirements or outright bans on the export of certain products. Other measures include guaranteed
purchase or requisitioning of goods. These are difficult issues. While governments rightly are
concerned to protect their own populations, the effect on other countries – and thus on global efforts to
contain the virus and prevent damaging second- or third-wave recurrences – can be severe.

Some countries are not able to produce their own medical supplies in sufficient quantities – or cost
effectively. This is especially the case as the virus starts to take hold in lower income countries, where
the priority for limited health budgets should not be building domestic manufacturing capacity. For
these countries – as has been the case for others that have experienced the virus to date – trade is
essential.

Indeed, areas already isolated due to the virus would have been worse off if they had to rely on the local
economy to guarantee supplies of medical equipment, food and other necessities and even those
countries with production capacity in medical equipment have struggled to meet demand. In the height
of COVID-19 outbreaks, even countries with significant manufacturing capacity may not be able to
fully utilize it due to labor shortages, or mobility restrictions. Moreover, even domestic manufacture of
equipment can rely on imported inputs; the danger of beggar-thy-neighbor policies is that you are also
your neighbor’s neighbor.

But if countries are to avoid these policies, they need to be sure that global markets will indeed supply
the needed goods. Transparency and global dialogue and co-operation are essential in building the
confidence in global supply. If export restrictions on medical supplies cannot be avoided entirely in the
current political context, agreements to place strict conditions on their temporary use are vital.

More broadly, to maintain confidence in global markets and co-operation, there is a need to avoid
further escalation in ongoing trade tensions. With firms rocked by the collapse in demand and the
ongoing uncertainty regarding the duration and severity of COVID-19 and associated containment
measures, now is also not the time to impose further costs, including through unnecessary policy
uncertainty. Imposing additional costs on firms and consumers through tariffs not only causes hardship
for those already suffering from lost income due to the crisis, but also risks increasing the size of the
government assistance needed to support those same firms and consumers. A positive step in boosting
confidence and reducing burdens would be for governments to commit not to impose new tariffs or
trade restrictive measures.

While trade was one of the first victims of the global economic crisis in 2008, new trade restricting
measures affected only about 1% of world imports. At that time, G20 leaders committed to refrain from
protectionist measures and to uphold the rules-based trading system, and WTO trade rules created some
certainty for businesses and stabilized the system by placing a ceiling on tariff measures. While there
are some differences, as well as similarities, in the current crisis (see Box), the uncertain economic
environment going into today’s crisis increases the need for a commitment to rules-based trade.

Lessons from the Global Economic Crisis?

As policy makers confront the significant challenge of COVID-19, many are asking whether there are
lessons from the experience of the global economic crisis, and to what extent the crises may be similar.
Some examples of the similarities and differences are below.

Differences

 Not just about confidence effects, economic activity is being shut down.

 Widespread across many sectors, simultaneously and sometimes instantaneously

 Requires large government investments – especially in the health sector, but also in social
protection given widespread job losses

 Mobility restrictions limit some of the automatic stabilizers/offsetting actions (informal work,
share economy) and impose additional costs

 Issues with medical equipment and biosecurity for food.

 More services-driven, given the limitations on physical contact and widespread closure of key
service sectors (tourism, travel, and entertainment).
 This crisis is having a disproportionate impact on MSMEs.

 Greater disruption to production leading to pressure on supply chains.

Similarities

 This crisis is coming in waves, as knock-on effects from problems in one sector or country
rebound and create new problems in other sectors (e.g. between the financial sector and the real
economy) or countries. Second- and third-order effects of policy actions can be unpredictable but
important.
 This will also be an employment crisis, with significant implications for supporting workers in
mass unemployment
 The crisis is having staggered effects globally, with Africa likely again to be last to experience
(but also least equipped).
 Governments are facing the challenge of having to act rapidly and at a large scale across a wide
range of policy areas.
 Governments must think immediate term, and longer term at the same time.

4. Look beyond the immediate: Policy actions now could have a long life

While countries are necessarily focused on ensuring the health and economic security of their people
today, the OECD can play a particularly important role in looking ahead and, in light of past and current
experiences, contribute to helping governments ensure a recovery that is robust, widespread, and
sustainable. Some key issues, and areas of OECD work, are highlighted below.

Firms and governments will need to re-think resilience in global supply chains

There is a live debate over the impacts of COVID-19 on the structure of global production and global
supply chains. For some, COVID-19 argues for supply chains to be re-nationalized, or at least
shortened, to reduce risks from global exposure. From this perspective, firms may need to re-think
sourcing decisions, resulting in re-ordering of global production, with potentially far-reaching
implications especially for developing countries. Equally, it is argued that governments will need to
reconsider the list of strategic goods for which there is a requirement for domestic production or impose
new sourcing constraints on businesses. Government procurement practices may also be revisited.

Yet there is a danger of making quick assumptions about what is necessary to ensure resilience.
Internationally, diversified production is often a source of resilience and adjustment for firms in an
adverse environment, while experience in the agri-food sector has shown that self-sufficiency of supply
is not the same as security of supply. There will also be a need for both firms and governments to think
again about how best to ensure the resilience of supply chains. This will require a better understanding
of the strengths and vulnerabilities of key supply chains in the current crisis and looking again at
resilience toolkits considering this. For firm strategies, this can mean re-examining, for example, the
structure of businesses globally including in relation to redundancy capacity and inventory stocks. For
governments there will be a need to consider the trade and investment policy environment that can best
support resilience; for example, the availability of digital infrastructure to reduce productivity hits in
pandemics or improvements to trade facilitation practices to minimize scope for disruptions related to
face-to-face processes. Governments may also need to consider special arrangements for specific supply
chains for strategic goods such as medical equipment; however, this should not necessarily be equated
with re-shoring of production. For face masks, for example, it would be very costly for each country to
develop a production capacity matching the current crisis demand and encompassing the whole value
chain; an alternative, effective and more cost-efficient solution may involve development of strategic
stocks or upstream agreements with companies enabling rapid conversion of assembly lines during
crises.

The OECD will be supporting governments in their consideration of these issues through investigation
of the consequence of COVID-19 on sourcing decisions of firms and the resilience and vulnerabilities
of particular global supply chains, including by drawing on the insights gained from the OECD Trade in
Value-Added (TiVA) database.

Doing more on trade and health to be ready for the next time

The current crisis offers an opportunity to develop readiness for future pandemics. In addition to
national measures to ensure supply, there may be scope for an international agreement to provide
greater predictability and certainty on availability of key supplies in international markets and build
confidence that trade will keep flowing to support the management of future pandemics.
A possible agreement among countries could include elements such as:

 Ensuring transparency: AMIS, created in the wake of the food price crisis of 2007-8 for
governments to share information on markets, policies and stocks for key commodities has underscored
the value of timely information and transparency in preventing crises induced by panic buying,
hoarding or export restrictions. Ensuring transparency in relation to trade-related measures related to
medical supplies, such as through sharing information with the WTO, can play an important role in
maintaining confidence in global supply.

 Cutting tariffs on essential medical products – countries could explore a WTO, including
plurilateral, initiative to remove tariffs on a to-be-agreed list of essential medical supplies (similar to the
agreement reached on Information Technology products).

 Disciplines on export restrictions – this could range from agreement to prohibit export bans for
certain kinds of goods, or to codify strict conditions on their use, building on the current G20 agreement
that states that: “emergency measures designed to tackle COVID-19, if deemed necessary, must be
targeted, proportionate, transparent and temporary, and that they do not create unnecessary barriers to
trade or disruption to global supply chains, and are consistent with WTO rules”4.

 Upfront investments in co-operative solutions – the creation of stockpiles of essential medical

supplies could include co-operative arrangements for creation of such stockpiles, including on a
regional basis.

 Addressing the needs of the most vulnerable countries – measures, for example in relation to
export restrictions and creation of regional stockpiles, could include specific exemptions or assistance
to address the needs of the poorest countries.

Analysis by the OECD and other international organizations on trade-related issues and impacts in the
context of the current pandemic could help inform possible discussions among governments on a trade
and health initiative.

Decisions on trade matter now, but also for ensuring that trade can help support recovery

With COVID-19 hitting countries at different times and rates, access to global demand via open
markets and continued trade will be important for supporting and sustaining economic recovery.

There is thus a need to consider how to keep trade flowing in the current crisis and to ensure it can help
underpin global recovery. This means both actions and decisions today and with an eye to the future.
OECD analysis will help inform governments as they consider the priorities for action, both nationally
and – critically – as they act together to build a more sustainable, inclusive, and resilient global
economy.

Before the COVID-19 outbreak, Pakistan’s economy was struggling to stay afloat but was in no
imminent danger of collapse. [1]  However, the pandemic has severely impacted the nation’s economy
and virtually pushed it to the brink of bankruptcy. While almost all nations have been substantially
affected by the global health emergency, Pakistan’s economy does not have the capacity to absorb
the massive disruption caused by the pandemic.
Months before the pandemic, in July 2019, Pakistan was forced to seek an Extended Fund Facility
(EFF) programme with the International Monetary Fund (IMF) due to its twin deficit problem, i.e.
fiscal and current account. With aggressive curbs on imports and massive devaluation, the country
managed to reduce the current account deficit (CAD) by over 70 percent in the first seven months
of Financial Year (FY) 2019-20. However, this came at the expense of economic growth, which fell
from 5.6 percent in 2018 to 3.3 percent in 2019. In 2020, it was being projected to fall further to 2.4
percent, without accounting for the pandemic. Meanwhile, the fiscal deficit problem continued
unchecked—partly because the revenue collections fell drastically short of the targets and because
the government slashed developmental expenditure to demonstrate a positive primary balance,
which was one of the conditionalities of the IMF programme.

Amidst the ongoing COVID-19 pandemic, both these deficits are likely to re-emerge, with a drastic
decline in exports and foreign remittances. Pressure will also mount on the expenditure front. In
2019, Pakistan’s military had voluntarily foregone any increase in the defence budget. Now, it is
likely to demand a substantial increase. Further, the government will be forced to reverse the trend
of cutting expenditure on health, education and other social service sectors. These issues are
compounded by Pakistan’s growing public debt, the servicing of which constitutes a substantial part
of the government expenditure.

The pandemic has forced most countries to break with the past and initiate deep reforms, not only in
the economy but also in politics and foreign and security policy. However, being a national security
state, Pakistan continues to adhere to its existing model, since changing its foreign and security
policy will require upending the power dynamics between the dominant military and the civilian
political establishment. Consequently, Pakistan is treating COVID-19 as an opportunity to obtain
concessions, bailouts and debt relief, [2]  to avoid undertaking the reforms it had accepted as part of
the 2019 IMF bailout. [3]  The country is also seeking bailouts from China and Saudi Arabia. While
helpful, these measures cannot replace the underlying need for deep structural reform in Pakistan.

II. PAKISTAN’S ECONOMY BEFORE COVID-19

On 2 January 2020, PM Imran Khan claimed that the government had stabilised the economy,
declaring this to be the year of growth, development and wealth creation. [4]  A week later, the
finance ministry issued a press release asserting that the economy was moving “progressively along
the adjustment path and stabilization process and economic recovery is expected towards the end of
FY2020.” The statement noted several achievements in the first five months of FY2020: the CAD
dropped by nearly 73 percent; the fiscal deficit was at 1.6 percent of GDP; the “primary balance”
was positive, at 0.3 percent of the GDP; the credit rating had improved from negative to stable; and
the country’s rank on the Ease of Doing Business Index had improved from 136 to 108. [5]
Foreign banks and ratings agencies, too, have endorsed Pakistan’s management of the economy. In
December 2019, Moody’s upgraded Pakistan’s credit outlook from negative to stable, [6]  and
Citibank’s top management in Pakistan commended the Khan government’s economic policies. [7]  As
late as the last week of February 2020, Credit Suisse released a report titled “Pakistan: On the Path
to Recovery,” noting that the “fundamentals” of the economy had improved significantly as a result
of the IMF package, fiscal consolidation and the necessary reforms being undertaken by the
government. [8]  In its second-quarter report on the state of the country’s economy, the State Bank of
Pakistan (SBP) claimed that the “cumulative effect of stabilization and regulatory measures taken
during the past one year” had led to “notable improvements” in the economy. Additionally, there
was an increase in foreign investment, tax and non-tax revenues and exports; currency had
stabilised; inflation had started to ease; and large-scale manufacturing showed “some positive
signs.” While the SBP tempered its optimism with several caveats, on the whole, it seemed to
suggest that the economy was on the right track. [9]
However, a closer look at Pakistan’s pre-COVID-19 economic landscape reveals a very different
picture. [10]  The 70 percent reduction in the CAD was a result of import compression and steep
depreciation of the Pakistani Rupee, which came at the cost of economic growth. [11]  From around
5.5 percent in FY18, Pakistan’s GDP growth came down to 3.3 percent in FY19, and was further
projected by the IMF to fall to 2.4 percent in FY20. The unofficial estimate by independent
economists was bleaker, at 1.9 percent in FY19 [12]  and 1.2 percent in FY20. While most
international organisations were projecting Pakistan’s growth to be around 2.4 percent in FY20,
[13]
 renowned Pakistani economist, Dr. Hafiz Pasha, estimated that the 3.3 percent growth claimed
by the government and multilateral institutions in FY19 was actually 1.9 percent, set to fall further
to 1.2 percent in FY20. [14]  Moreover, Dr. Pasha predicted a fall in per capita income in light of the
population growth rate of 2.4 percent. [15]  Thus, Pakistan’s economy was faltering on virtually every
economic parameter.
The increase in foreign exchange reserves (after the IMF approved the EFF programme in 2019)
was largely based on borrowed money, such as bailout loans from China, Saudi Arabia and the
UAE. [16]  Despite a nearly 30 percent depreciation in the value of the Pakistani Rupee, exports
increased only marginally. In the first nine months of the current fiscal year, exports rose by only
2.2 percent in dollar terms. [17]  Meanwhile, there was a steady rise in inflation. The data released by
the Pakistan Bureau of Statistics shows that the year-on-year inflation in January 2019 was 5.6
percent, with food inflation at 2.6 percent and 1.8 percent in urban and rural areas, respectively.
[18]
 However, by January 2020, the percentage had spiked to 14.6 percent, with food inflation at 19.5
percent in urban areas and 24 percent in rural areas. In March 2020, the inflation number did fall to
10.2 percent, with food inflation at 13 percent and 15.5 percent (urban and rural, respectively),
[19]
 but this was largely due to the disruption and dislocation caused by the pandemic.
As part of the IMF agreement and to control inflation, the SBP had been steadily raising interest
rates. From 6.5 percent at the time when the Pakistan Muslim League-Nawaz ( PML-N) government
demitted office in May 2018, the SBP’s benchmark interest rate increased to 13.25 percent in July
2019. [20]  The high interest rate was also meant to attract ‘hot money’ into Pakistan. Around US$ 3
billion flowed into Pakistan in the form of purchases of short-term treasury bonds, but it started to
flow back as soon as the COVID-19 crisis started to unfold in the West. [21]
Ultimately, high taxation, [22]  high interest rates, and the devaluation of the Pakistani Rupee (which
raised the prices of imported inputs) lead to a massive fall in industrial production. [23]  According to
Dr. Hafiz Pasha, “Many of the industries have registered double-digit declines in the first four
months of 2019-20. The production is down by 43 percent of cars; 19 percent of motorcycles;
petroleum products by 14 percent; cigarettes by 36 percent; steel products by 30 percent; chemicals
by 20 percent and so on. In fact, out of the 112 product lines covered by the QIM, there has been a
decline in output in 65 lines.” [24]
Even as the industry was facing an unprecedented crisis, it was reported that the cotton output
would be 20 percent lower than in the previous year. [25]  Since textiles (mostly cotton) constitute
nearly 60 percent of Pakistan’s exports, this slump in cotton output would pose an additional
foreign-exchange burden, because Pakistan’s dependence on cotton imports would increase to keep
the textile industry running.
The tax target of PKR 5.5 trillion set for the Federal Board of Revenue (FBR) became impossible to
achieve after the sharp fall in growth. The Government of Pakistan and the IMF commended the 17
percent rise in revenue but failed to factor in the inflation of 12–14 percent, which meant that the
actual increased in revenue was only three to four percent. In December 2019, at the time of the
second review of the EFF programme, Pakistan requested the IMF for a lower tax target of PKR
5.23 trillion. [26]  By February 2020, however, Pakistan was forced to demand a further reduction to
PKR 4.8 trillion. [27]  This steep fall in revenue targets came before the pandemic, even as the
expenditures remained static, portending a fiscal deficit that would breach the target set in the
2019–20 budget. [28]
Since the Imran Khan government came into office in 2018, the fall in growth coupled with high
food prices and rising unemployment had caused almost 10 percent of the population to slip below
the poverty line. According to Dr. Pasha, around eight million people (four percent of the
population) fell below the poverty line in FY19, which is likely to increase by an additional 10
million people (five percent of the population) by the end of FY20. Thus, nearly 87 million people
in Pakistan will be living below the poverty line by 2021. [29]
According to the Debt Policy Statement issued by the government earlier this year, Pakistan’s debt
has increased by almost 40 percent since Imran Khan assumed office. The total debt and liabilities
increased from PKR 29.9 trillion in FY18 to PKR 41.5 trillion in September 2019. Additionally,
public debt as a percentage of revenue went up from 447 percent to 667 percent in the span of one
year, and debt servicing as a percentage of revenue increased from 37.3 percent to 62.5 percent
between FY18 and FY19. [30]  According to the IMF’s estimates, Pakistan’s external debt would reach
US$ 113 billion by the end of FY20 [31]  and that the country would need over US$ 27 billion to
finance its external requirements. [32]
III. AFTER COVID-19: DIRE PREDICTIONS
In Pakistan, the first confirmed cases of COVID-19 emerged only in the last week of February. [33]  A
month earlier, Pakistan’s Ministry of National Health Services had alerted border posts and
healthcare institutions to be vigilant about any suspected cases. [34]  A week after this alert was
issued, authorities in the Gilgit Baltistan region of Pakistan-occupied Kashmir announced that the
land border with China, which was to open in the first week of February, would remain closed until
April. [35]  Beyond these measures, however, the nation’s overall attitude towards the pandemic
remained blasé. Additionally, it felt that China’s misfortune, i.e. a fall in production, could be an
opportunity for Pakistan to increase its exports, particularly textiles. Many analysts believed that
Pakistan could benefit from industries relocating from China to prevent supply chains from being
overly dependent on a single country. [36]
Towards the end of February, the possibility emerged of the pandemic leading to negative growth in
Pakistan. [37]  Disruption in raw material supplies from China prompted alternative sources to increase
prices, and Pakistani manufacturers started to feel the pinch. [38]  Textiles, which constitute almost 60
percent of Pakistan’s total exports, depended on China for 70 percent of their input requirements.
Overnight, the cost of importing from China surged by up to 100 percent. Since Pakistan had
banned all trade with India, the only alternative sources left were South Korea and Taiwan, which
too had spiked prices by 30–35 percent. [39]  Pakistan’s privatisation drive was at the risk of being
delayed due to the withdrawal of Chinese companies that had expressed interest in picking up some
of the power plants that were being put on the block. [40]
Despite these issues, the magnitude of the crisis continued to be either ignored or downplayed at the
official level. On the day the first infected cases were discovered, the de facto Health Minister Dr.
Zafar Mirza said, “With Allah’s blessings, this [virus] will not take the form of an outbreak in
Pakistan.” [41]  Khan, too, appeared nonchalant about the seriousness of the infection during his
national first address on the pandemic. “Ghabrana nahin (don’t panic),” he said, claiming that
while the virus would spread, 97 percent of the people will survive it, and that it is just like any
other flu. [42]  However, it has now become increasingly clear that COVID-19 is catastrophic for
Pakistan’s already ailing economy. On virtually every single economic metric, Pakistan is staring at
an abyss.

Economic issues currently facing by Pakistan

Growth
The economy has been unravelling at such a bewildering speed that even seasoned institutions and
individuals cannot accurately estimate the extent to which the pandemic will impact growth. In the
first week of March, the Asian Development Bank (ADB) came up with a number that seemed
incongruous with the dire predictions being made around the world. According to the ADB,
Pakistan’s economy would lose around US$ 16 million in the best-case scenario and around US$ 61
million in the worst-case scenario. In the event of a significant outbreak of COVID-19, the loss
would amount to approximately US$ 5 billion, the GDP would contract by 1.57 percent, and nearly
a million people would lose their jobs. [43]  By the third week of March, the ADB had drastically
revised its estimates to a US$ 415 million loss in the best-case scenario, and a US $6.6–17 billion
loss in case of significant outbreak, with the loss of employment ranging from 1.2 million to 3.2
million jobs and the GDP growth contracting by two to five percent. [44]
Moody’s, too, has been constantly revising its growth projections for Pakistan. In December 2019,
just before the pandemic hit the world, it projected a GDP growth of around 2.9 percent in FY20.
[45]
 By mid-March, this was reduced to 2.5 percent because of the higher debt burden and weaker
fiscal balances of the government, [46]  and by end-March, the number was down to two percent.
[47]
 Both ADB and Moody’s projections—2.6 percent and two percent, respectively—were in line
with Pakistan’s growth estimations. In the third week of March, Pakistani authorities projected a
GDP loss of PKR 1.3 trillion due to supply shocks, disruption in foreign trade, suspension of
operations of service and manufacturing industries; [48]  two weeks later, the estimate was increased
to PKR 2.5 trillion, with nearly 20 percent of the workforce projected to lose their jobs. [49]  The
Pakistan Planning Commission declared that the virus would lead to a 0.8–1.3 percent loss in the
GDP, which would bring the growth down from 3.3 percent to around 2.5 percent. [50]  However,
multilateral institutions such as the World Bank and IMF, and independent economists in Pakistan
did not share this optimistic assessment.
In a video conference held on 2 April 2020, the World Bank office in Pakistan noted that the
nation’s GDP growth would reduce from 2.4 percent (the earlier projection for FY20) to 1.1
percent. The fiscal deficit would reach nearly 10 percent. [51]  On 12 April 2020, however, the World
Bank’s “South Asia Economic Focus” report forecasted a GDP growth of negative 1.3 percent in
FY20 and 0.9 percent in FY21. If the pandemic worsened, the GDP could contract by 2.2 percent in
FY20, being only barely positive (0.3 percent) in FY21. The World Bank Report lists Pakistan’s
population growth rate to be 1.8 percent, noting the prospect of a “painful decline in per capita
income.” [52]  According to the 2017 Census, however, the growth rate is 2.4 percent, which only
exacerbates the situation further. [53]  While IMF, too, has projected a negative 1.5 percent growth in
GDP in FY20, it is more optimistic than the World Bank about growth prospects of the Pakistani
economy in FY21, estimating a two percent GDP growth. [54]
The magnitude of the crisis confronting Pakistan is evident in the negative growth being projected,
this being the first time in history that its economy will contract. Independent Pakistani economists
Dr. Hafiz Pasha and Dr. Shahid Kardar initially presented two scenarios of different severity. In the
best case, the economy would contract by 4.6 percent in the fourth quarter of FY20, and in the
worst case, by 9.5 percent. [55]  Eventually, Pasha and Kardar simulated a third scenario, taking into
account new information. According to this, Pakistan’s GDP would contract by 13.6 percent in the
fourth quarter of FY20, and as many as 11.5 million people could face temporary job loss due to the
lockdown. Their projection for long-term job loss is approximately 6.5 million, an unemployment
rate of 16 percent. Nearly 15–20 million people could slip into poverty, and the total number of
poor is likely to cross the 100 million mark, i.e. almost 50 percent of the population. [56]
Unemployment and Poverty
The poverty and unemployment estimates by the Pakistan Institute of Development Economics
(PIDE) are even more dire than those of Pasha and Kardar. In a series of bulletins published on the
likely impact of COVID-19, the PIDE presented four possibilities. The worst-case scenario is “high
impact,” and entails a 0–1.5 percent GDP growth. PIDE estimates that poverty rate will increase
from around 23.4 percent to nearly 59 percent (an additional 75 million people), bringing the total
population living below poverty line to 125 million people. [57]  However, in light of the looming
recession and likely negative GDP growth, this scenario could be a conservative estimate.
The PIDE has estimated that 56 percent of the workforce falls under “vulnerable employment.” This
includes 80 percent of the people employed in agriculture, 75 percent in wholesale and retail trade,
50 percent in hotels and restaurants, 60 percent in real estate and business, and 40 percent in
transport and communication sectors. [58]  The World Bank expects the brunt of the recession to be
borne by the informal sector (which accounts for 72 percent of employment) and daily-wage
workers employed in the formal sector (who constitute five percent of the total workforce).
[59]
 According to a PIDE study, in the event of a complete shutdown, around 18.5 million people (30
percent of the employed labour force) who were part of vulnerable employment would be laid off.
This scenario is now unlikely, given the relaxation in lockdown. However, even with moderate
restrictions, over 12 million people (20 percent of the employed labour force) could lose their jobs.
Within the vulnerable employment, the bulk of the layoffs would comprise daily-wage workers and
those who work on a piece-rate basis. [60]  Formal-sector workers are also at risk. According to one
report, one of Pakistan’s largest hotel chains has already laid off 20 percent of its workforce.
[61]
 There is a growing sense of insecurity about employment in the country. In a survey by IPSOS,
51 percent of the surveyed people (from both urban and rural areas) were concerned about losing
their jobs over the next six months. [62]  The situation is further exacerbated by the looming prospect
of tens of thousands of Pakistanis working in the Middle East, losing their jobs and returning home,
[63]
 which will also impact the remittances that are so critical for Pakistan’s balance of payments.
Punjab, the most populous province in Pakistan, will suffer the majority of job losses. PIDE
estimates that 10–12 million people in Punjab could get laid off. Compared to other provinces,
Sindh has the least number of vulnerably employed, but the estimates are alarming nonetheless,
with three to four million people at risk of job loss. For the other two provinces, PIDE data suggests
that two million in Khyber Pakhtunkhwa and one million in Balochistan are likely to be rendered
unemployed. [64]  According to the calculations of Pasha and Kardar, the unemployment rates by
province will be 16 percent for Punjab, 15 percent for Sindh, 14.5 percent for Khyber Pakhtunkhwa,
and nine percent for Balochistan. [65]
Foreign Trade and Balance of Payments
A PIDE study into the trade disruptions caused by COVID-19 and its impact on Pakistan’s GDP had
worked out a worst-case scenario in which there would be a 20 percent decline in exports and
imports. Almost 70 percent of Pakistan’s imports constitute raw materials, intermediate goods, and
capital goods; around 60 percent of exports are textiles, which depend heavily on imported raw
materials. Therefore, a decline in imports will, in turn, affect both exports and growth. By the
PIDE’s calculations, a trade disruption of 20 percent would lead to a GDP contraction of 4.6
percent in the last quarter of FY20. [66]
The latest data released by the Pakistan Bureau of Statistics validates the PIDE’s worst-case
scenario. In March 2020, imports fell month-on-month by over 20 percent and exports by over 15
percent. [67]  Textile exports fell by 18 percent, [68]  machinery imports by 15 percent, petroleum
imports by 40 percent, and imports of raw material for textiles by 20 percent. [69]  In its latest country
report on Pakistan, the IMF found a sharp decline in container traffic, which is “consistent with
cancellation of export orders or requests to delay the shipments.” [70]  This was corroborated by the
Pakistani media, which reported containers piling up at the ports. According to one report, between
22 March and 3 April, there was a 31 percent fall in shipments of export containers at the Karachi
port, with nearly 7,000 containers not being shipped. Further, there was a 50 percent decline in the
number of containers reaching the port, due to order cancellations. [71]  According to Pakistani textile
exporters, nearly 50 percent of the “ready for shipment” export orders were delayed by importers
because of lockdowns in Europe, which they anticipate will result in order cancellations.
[72]
 Meanwhile, the hosiery manufacturers claim that for 90 percent of their exports to the US and
Europe, clients have either cancelled orders or refused to accept shipments. [73]  Pakistan’s commerce
ministry has estimated an export loss of US$ 2 billion, in addition to delayed payments of
shipments already sent. This will create huge cash-flow problems for the textile industry.
[74]
 According to the de facto Commerce Minister Abdul Razzak Dawood, the export loss could go
up to US$ 4 billion. [75]
The prospect of reduced remittances by overseas Pakistanis further adds to the crisis. Remittances
account for approximately eight percent of the country’s GDP, being equal to (and sometimes more
than) exports. COVID-19 is expected to have a severe impact on the remittances, especially from
the Middle East. The IMF has estimated a drop of over US$ 5 billion in FY20 and FY21. Together
with the fall in exports, this will significantly impact Pakistan’s external finances.

Given the decline in imports, the IMF has projected a manageable CAD of around 1.7 percent in
FY20 and 2.4 percent in FY21. [76]  However, these CAD calculations will be rendered inaccurate if
the remittances fall below current projections. According to the worst-case scenario presented in a
PIDE paper, remittances in FY20 could decline by 14 percent, i.e. US$ 3.5 billion. The PIDE’s
projections for FY21 are even more concerning, showing a 47 percent fall in remittances in the
worst-case scenario, reducing the baseline projection of US$ 26.5 billion to just over US$ 14
billion. Even in the best-case scenario, remittances are likely to fall by around 15 percent, bringing
in only US$ 22.5 billion. [77]  The World Bank estimates are bleaker than the PIDE’s, at 23 percent or
over US$ 5 billion in FY20 alone. [78]  If the World Bank or PIDE projections come true, then
Pakistan’s balance-of-payments difficulties are likely to increase, especially given its external
financing requirements. Speaking in a webinar, the chief macroeconomist of Pakistan’s Planning
Commission revealed that the country will need to return US$ 19 billion in principal and interest to
international creditors. With the fiscal space getting further constricted, exports and remittances
declining, and international financial markets tightening, Pakistan could face serious problems in
servicing its debt. [79]
Fiscal Balance and Revenue
Even before COVID-19, economic activity in Pakistan had slowed down to a point that the
government was simply unable to collect its tax target of PKR 5.5 trillion. The target was scaled
down to PKR 5.2 trillion in December 2019, and to PKR 4.8 trillion by February 2020. Post
COVID-19, the IMF has conceded that Pakistan will only be able to collect PKR 3.9 trillion in
FY20, a shortfall of PKR 1.6 trillion. Moreover, the latest tax target of PKR 3.9 trillion means that
in the last three fiscal years, i.e. FY18, FY19 and FY20, the revenue collected by Pakistan’s FBR
has remained almost identical, even as expenditure has increased by PKR 2.6 trillion. For FY21, the
IMF has projected a tax revenue of PKR 5.1 trillion, which is PKR 1.2 trillion more than what the
FBR is expected to collect in FY20. However, this target is unachievable in an economy expected to
grow by only two percent, by IMF’s own calculation.

Although Pakistan is expected to incur the highest ever fiscal deficit in FY20, at around 9.2 percent
of the GDP, the IMF is convinced that the country will be able to bring this down to 6.5 percent by
FY21. [80]  This conviction seems unfounded, especially since experts are questioning Pakistan’s
ability to meet even the drastically cut-down target of PKR 3.9 trillion in FY20. [81]  Moreover,
factoring in the PKR 1.2 trillion stimulus package to combat the COVID-19 crisis would push the
fiscal deficit to double digits in FY20. However, the IMF has agreed to exclude the expenditure
incurred in combating the virus while calculating Pakistan’s fiscal deficit in the current fiscal year.
[82]
 Thus, Pakistan has been failing to meet the targets formulated by the IMF, and data suggests that
the situation will remain the same in future. For now, the IMF continues to make accommodations
for the country’s shortcomings. One example of this is the drastic cut in the development
programme to meet the IMF targets, despite the IMF insisting against such cutbacks in development
expenditure. The Federal government had budgeted PKR 701 billion for the Public Sector
Development Programme (PSDP) in the annual budget for 2019–20. [83]  However, shortly before the
pandemic, Pakistan cut the PSDP to PKR 588 billion to meet its obligations on primary balance.
Post COVID-19, it was further reduced to PKR 488 billion. Thus, the PSDP was cut down by
almost 30 percent of the original budgeted amount. The provinces development programme, too,
has been reduced from the budgeted PKR 912 billion to PKR 461 billion in the aftermath of the
pandemic, i.e. a reduction of almost 50 percent. [84]
Trade, Industry and Business
As established in the previous sections, Pakistan already had very little fiscal space to absorb any
major shock. Unlike most other countries, Pakistan does not have the financial bandwidth to
provide meaningful succour to businesses on the verge of failure due to the pandemic. According to
calculations made by Pasha and Kardar, in the fourth quarter of FY20, the industrial sector is
estimated to contract by 14–22 percent, while the services sector by 11–15 percent. Agriculture is
expected to grow by a marginal one percent. [85]  The World Bank expects industrial growth to
contract by 2.1 percent and services sector by 1.7 percent in this entire FY20. In FY21, the
industrial and services sectors are expected to remain anaemic, at 0.7 and 0.8 percent, respectively.
[86]

The latest data by the Pakistan Bureau of Statistics reveals that large scale manufacturing (LSM),
which accounts for nearly 80 percent of total manufacturing and around 11 percent of the GDP, has
shown a negative three percent growth in the first seven months of FY20. The petroleum sector has
witnessed the steepest decline of around 14 percent. The data shows a worsening trend year-on-
year, with the output decreasing by 36 percent and 1.15 percent for petroleum companies and LSM
companies, respectively. [87]  The disaggregated data reveals an even bleaker situation, with the
automobile sector, pharmaceuticals, agricultural machinery, white goods (e.g. air-conditioners and
refrigerators) and power looms taking a substantial hit. [88]  The data for March 2020 is even worse.
According to the Pakistan Bureau of Statistics, LSM output in March 2020 declined by nearly 23
percent year-on-year and 22 percent as compared to February 2020. [89]
Reports from the ground reveal that businesses and industries are in deep distress. Pakistan’s
flagship carrier, Pakistan International Airlines (PIA), which was already incurring losses, has been
listed as the airline most at risk of bankruptcy in the next two years because of the COVID-19
crisis. [90]  Pakistan’s Ministry of Aviation ministry has estimated that the sector could lose up to
PKR 25 billion in just two weeks of lockdown. [91]  The Pakistan Railways was losing PKR 1 billion
per week due to the lockdown. [92]  Amongst the worst hit is the automobile sector, with sales down
by nearly 50 percent. [93]  The pharmaceutical sector, which was already reeling under the impact of
PM Khan’s decision to ban all trade with India, [94]  has seen a drop in sales by 50 percent and an
increase in the cost of raw material (mostly imported from China) by 300 percent. [95]  In the telecom
sector, too, revenues have fallen by 10–15 percent due to a decline decrease in voice traffic amidst
the lockdown. Much of the telecom revenue came from pre-paid cards, which are not being
recharged as frequently, given the restrictions on movement. [96]
Small and medium businesses are also suffering, particularly the small traders. In 2014, it was
estimated that a one-day nationwide shutdown costs the economy over PKR 60 billion.
[97]
 Extrapolating from this and adjusting for 2020, the economy would bleed at least PKR 100
billion a day, which is corroborated by the estimates made in early April, i.e. a loss of PKR 2.5
trillion. According to a recent report, in the main commercial centres in Rawalpindi, small
businesses are losing over PKR 600 million daily. [98]  In a petition to Khan, the association of large,
tax-paying organised retailers has claimed a loss of PKR 900 billion in 45 days of lockdown. [99]
Energy
Amidst the largely negative impact of COVID-19 on Pakistan’s economy, the crash in the prices of
oil comes as a relief. Petroleum products constitute around 30 percent of Pakistan’s total imports.
Thus, a fall in Petroleum, Oil & Lubricants (POL) prices is a windfall for the country, since it not
only eases the pressure on the balance of payments, but also helps moderate inflationary pressures
if the government reduces prices. Further, if the government does not reduce taxes on petroleum
products, it can garner additional taxes for the exchequer. During the current crisis, Pakistan has
tried to balance the fiscal needs with the need to provide relief to people. With regard to petroleum,
despite reducing prices by PKR 15 per litre, the government expects to gain an additional PKR 60
billion in the next fiscal. [100]
However, the reduction in international oil prices is at best a mixed bag. While Pakistan could save
approximately US$ 5–8 billion on its oil import bill if the prices remain at the current levels, this is
likely to be compensated by the fall in remittances because of lay-offs of Pakistani expatriate
workers in the Middle East. Moreover, due to the steep fall in oil revenues, these countries will now
be hard-pressed to provide any financial bailouts to Pakistan.

The fall in the oil prices is not a panacea for all of Pakistan’s economic woes. According to an
energy-sector expert, it will present a challenge for the local oil industry, in turn depriving the
government of up to PKR 250 billion in taxes and other revenue. [101]  In theory, Pakistan’s cost of
power generation should decrease with the fall in POL prices, since 66 percent of it is based on oil
and gas. [102]  However, this is unlikely to happen due to the kind of contracts that the country has
signed with the independent power producers, which mandate that they must be paid capacity
charges regardless of the consumption of electricity generated. In March alone, electricity
consumption was down by 30 percent, gas consumption by 40-50 percent, and petrol and diesel by
around 60-75 percent. [103]  This is compounded by the fact that Pakistan does not have the storage
capacity to buy and stock up oil at cheap prices to hedge against the future rise in prices. [104]
Despite the oil price windfall, the COVID-19 crisis is going to exacerbate the financial crisis in
Pakistan’s energy sector. Already, the “circular debt” has touched an astronomical PKR 2 trillion
mark. [105]  Relief measures for power consumers will cost over PKR 380 billion, according to
calculations made by the power division of the government. [106]  The crisis is exacerbated by the fall
in the collection of bills during the lockdown, in part due to the instruction to not collect bills from
consumers using less than 300 units for the next three months, [107]  as well as the government’s
decision to raise power tariffs under pressure from Chinese power producers demanding
compensation for the exchange-rate losses incurred because of the fall in the value of the Pakistani
Rupee by around 10 percent.

Debt
Pakistan’s public finances were already in a parlous state. The COVID-19 crisis has made it even
more difficult for Pakistan to service its mountain of debt. In FY19, the net revenue of the Federal
government was less than the debt servicing incurred by the government, i.e. much of the
government’s expenditure was incurred through debt. In the 18 months since the previous PMLN
government demitted office, Pakistan’s total debt and liabilities have gone from PKR 30 trillion to
PKR 41 trillion. The Central government’s debt increased by over five percent in the first eight
months of FY20, and by 21 percent year-on-year in February 2020. According to the IMF’s
estimates, the federal government’s debt has surged from 80.4 percent of the GDP pre-COVID1-9
to 85.4 percent post-COVID-19.
The pandemic gave Pakistan an opportunity to obtain debt relief, particularly for its external debt,
at US$ 107 billion or 38 percent of the GDP. It viewed the crisis as a way out of the economic
straitjacket imposed by the IMF. In the words of one of Pakistan’s top economic journalists,
“Covid-19 has affected most of the global economies which should provide a room for the
International Monetary Fund (IMF) to relax stance on critical programme benchmarks. In fact, the
situation also provides an opportunity to access emergency funds allocated by leading international
lending agencies to fight coronavirus. This is reminiscent of Pakistan’s strategy after the 9/11
tragedy. Under the guise of “unstinted support” to the US-led coalition forces against the Taliban
and Al Qaeda terrorists, Pakistan sought to be rewarded monetarily. In an interview on national TV,
Gen. Pervez Musharraf, the then military dictator of Pakistan, noted, “Our strategy is to go for debt
write-off, as the country has US$ 38 billion debt, including US$ 12 billion bilateral and the
remaining multi-lateral debt. Despite such efforts, however, Pakistan only managed to obtain a new
IMF programme and a rescheduling of around US$ 12 billion worth of debts to the Paris Club.
Currently, Pakistan is obligated to return around US$ 28 billion to creditors in the next three
years. Once again, the country is seeking to obtain loan write-offs; short of that, it hopes to get
around 50 percent (US$ 14 billion) of loans rolled over. Already, Pakistan has received US$ 9
billion in bailouts in 2019, from countries such as China, Saudi Arabia, UAE and Qatar. The IMF
insists that the money being given to Pakistan cannot be used to pay back its loans from ‘friendly
countries’ and expects China to lend an additional US$ 6 billion to Pakistan over the next 12
months
Pakistani Foreign Minister Shah Mehmood Qureshi has lobbied over a dozen countries for debt
relief in some form—as moratorium, restructuring or even debt write-off. Additionally, the Pakistan
foreign office launched an intense diplomatic push for debt relief, hoping to get a waiver on not
only bilateral loans but also multilateral loans. According to the de facto Finance Minister Abdul
Hafeez Shaikh, Pakistan would be approaching the IMF, World Bank and ADB to seek US$ 4
billion in fresh loans to combat the COVID-19 crisis.
So far, Pakistan has managed to obtain a Rapid Financing Initiative loan worth US$ 1.4 billion from
the IMF to meet its balance-of-payments needs to tide over the pandemic.  The World Bank and the
ADB have also pledged around US$ 2.5 billion in assistance. Much of this comes from funds that
had been allocated for projects already under execution but were either moving slowly or were
stalled and are now being diverted for COVID-19 assistance.

IV WEIGHING THE MITIGATION MEASURES

Government Rescue Package

Considering the massive economic disruption, Pakistan’s government announced a rescue package
worth PKR 1.2 trillion on 24 March 2020. Of this, PKR 150 billion was allocated for direct benefit
transfer to the most vulnerable families, with each family receiving PKR 3,000/month for four
months, disbursed upfront as a single payment of PKR 12,000. PKR 100 billion was allocated to
SMEs and agricultural loans towards deferred payments; PKR 280 to wheat procurement; PKR 200
billion to the labour force; PKR 75 billion to reduce the prices of petroleum products; and PKR 100
billion for the export sector, in lieu of the refunds due to them.
While this package seems impressive, many of the items included under it were already part of the
government budget. For example, the government is obligated to provide refunds to exporters but
had been postponing it. Similarly, wheat procurement is supposed to be done annually as part of a
government undertaking and taking loans from banks under “commodity operations” is par for the
course. Furthermore, the income support programme for the most vulnerable sections had already
been included in the FY20 Budget, but the bulk of it remained unutilised, which was now being
presented as a separate allocation. By the Pakistani cabinet’s own admission, the additional burden
on the exchequer is less than half of the total package, i.e. PKR 550 billion.  The IMF, while lauding
the “comprehensive fiscal support package aimed at accommodating the spending needed to
mitigate the impact of the Covid-19 shock,” pegged it at 1.2 percent of the GDP (~ PKR 500
billion), compared to Khan’s claim of two percent.

State Bank of Pakistan

The SBP has formulated a slew of measures in response to the pandemic, [128]  of which the most
significant one was to reduce the benchmark policy rate from 13.25 percent to nine percent.
Pakistani businesses had long been demanding a cut in the interest rate, since the high rate of
interest was an impediment to doing business. The SBP governor had previously been opposed to
the move [129]  because of high inflation, but the outbreak of COVID-19 on 16 March 2020 forced the
SBP to cut the interest rate by 75 basis points. The rate was reduced by another 150 basis points a
week later, and by 200 basis points more three weeks after that. [130]  Businesses have demanded the
rate to be further reduced by four to five percent. While this move will provide temporary relief, it
is unclear whether it will stimulate economic activity despite the pandemic, and if old stimulus
tools will work in such an unusual situation. For example, top economists have already questioned
the efficacy of the Pakistani government’s package for the construction industry in kickstarting
economic activity. [131] , [132]  Members of the construction industry, too, remain sceptical. [133]
External Debt

On the external debt front, Pakistan is set to receive US$ 4 billion from the IMF, WB and ADB,
[134]
 and there is some talk of the Islamic Development Bank offering a package of US$ 650 million.
[135]
 However, debt write-offs are unlikely to be offered. Much of Pakistan’s hopes have been pinned
on the G20 summit—in particular, on the Paris Club countries. On the eve of the G20 meeting, PM
Khan and Foreign Minister Qureshi lobbied other G20 countries for debt relief. [136]  However, as
some Pakistani journalists pointed out, the Paris Club component had already rescheduled
Pakistan’s debt in 2001, [137]  and Saudi Arabia, China and UAE had previously undertaken to “roll-
over” their debts as part of the conditions imposed by the IMF for granting the EFF facility in 2019.
[138]

In April 2020, the G20 and the Paris Club had only provided debt relief to the “highly indebted
poor countries.” Since this did not include Pakistan, the country was left with no relief in terms of
rescheduling or moratorium. On 15 April 2020, the G20 and the Paris Club announced a one-year
debt relief to the poorest countries, [139]  including Pakistan. The country expected to receive US$ 10–
15 billion in relief, [140]  and some analysts postulated a US$12 billion debt repayment obligation
under the plan. [141]  Khan welcomed the move, [142]  and Qureshi credited it to the PM’s diplomatic
standing, calling it a “great” and “very timely decision.” [143]  Qureshi further noted that while
Pakistani officials were doing a detailed study of the impact of the G20 debt relief, it would likely
be “substantial.” [144]  However, the G20 statement offered a maximum debt relief of approximately
US$ 1.5 billion, which they had to service to the Paris Club over the next two years. [145]  On 20 April
2020, the IMF’s Resident Representative for Pakistan revealed that the country had not yet made an
official request for debt relief. [146]  According to Pakistan’s finance ministry, the maximum relief
they expected to get was only around US$ 1.7 billion. [147]
V. THE POLITICAL AND STRATEGIC FALLOUT
The economic fallout of COVID-19 will be severe on Pakistan. This, in turn, will impact its
domestic politics as well as foreign, security and strategic relations with other countries. To meet
the challenge of the economic downturn, the country must initiate sweeping economic, political and
security reforms, which will require significant bailouts from international donors and friendly
countries. However, Pakistan is neither inclined to making reforms nor likely to receive any major
bailout programme, since most donor countries have to provide huge stimulus packages to kickstart
their own economies, leaving little fiscal space to assist other countries. The IMF’s EFF
programme, too, has been suspended for now, and pressure is growing on the Imran Khan
government to re-negotiate it. [148]
In the absence of traditional donor countries and institutions, Pakistan must turn to ‘friendly
countries’ such as China and Saudi Arabia. The Saudis have already given Pakistan US$ 3 billion as
deposits to improve its national balance sheet and have extended a deferred oil-payment facility
worth an additional US$ 3 billion. Thus, Pakistan’s hopes are currently pinned squarely on the
“Iron Brother,” i.e. China. However, Chinese businesses and officials are concerned about the
viability and profitability of Chinese investments. Already, Pakistan has requested China to relax
the payment obligations due to them for the power plants set up under the aegis of the China–
Pakistan Economic Corridor (CPEC). [149]  Further, the inquiry commission set up to investigate the
Independent Power Projects in Pakistan has reported that a “$1.7 billion power transmission line
project of the China-Pakistan Economic Corridor (CPEC) was 234% more expensive than a similar
project in India with better technology.” [150]
In the fast-changing geostrategic scenario after COVID-19, however, China could put aside some of
its commercial and financial concerns regarding Pakistan to strengthen their strategic relationship.
Pakistan’s dependence on China for economic, military and political support is likely to increase in
future, placing it firmly in the latter’s ambit. Many Pakistani analysts and thinkers feel that the
nation’s future lies with China, not with the West. COVID-19 has only cemented this conviction
further. The Sino-Pak relationship will not obviate Pakistan’s need to engage with the West, but it
will allow room for manoeuvre in its dealings.

For the US and its Western allies, the pandemic offers an opportunity to effectively pressure
Pakistan, provided they do not allow altruism to guide their policy. Pakistan is currently far more
vulnerable than it has been since the War on Terror started in 2001 and can be forced to deliver on
issues it has reneged on in the past, especially in the context of Afghanistan and terrorist safe
havens in Pakistan. However, it appears for now that these economic vulnerabilities will not impact
Pakistan’s strategic game-plan in Afghanistan. The US has evidently lost interest in Afghanistan
and seems inclined to engage with the Taliban on their terms. Even the FATF has eased the pressure
on Pakistan. In this very limited sense, the COVID-19 outbreak has worked in favour of Pakistan.

Internally, the pandemic will result in dislocation and economic distress. Poverty and
unemployment are bound to increase, as discussed in Section 3. There are serious concerns of law-
and-order disturbances and rise in crime. While the Opposition will try to capitalise on the
problems of the government, so far, there is no sign of the current dispensation being destabilised
or deposed. The Opposition parties are not strong enough to not confront the ruling government and
 would prefer that PM Khan to bear responsibility for all the tough decisions that will need to be
taken to keep the economy from derailing.

In the 20 months since he has assumed office, Khan’s lack of administrative and governance skills
has become evident. However, destabilisation is unlikely, since he continues to enjoy the support of
the military, which paved his way to power. Despite occasional reports of rifts between Khan and
the military, there have been no significant long-term fallouts. According to a member of the
cabinet, this is because “Imran Khan agrees to whatever the military says.” [151]  Moreover, Khan’s
government has responded to the pandemic in complete adherence to the military vision, [152]  which
further cements his position. There are three primary reasons that Imran Khan still enjoys
unequivocal military support:
1. The military has no viable political alternative.
2. Khan serves as the military’s interface with the rest of the world, actively seeking loans and
bailout packages from friendly countries.
3. His anti-India stance endears him to the Pakistani deep state. [153]

Unless the situation on the ground changes drastically, such that the military no longer finds it
tenable to keep Imran Khan in office, he is likely to remain the face of the government for the
foreseeable future.

However, problems can arise between the military and the civilian government due to the economy.
While there is growing pressure from the military to increase defence budget allocations, the
precarious fiscal situation leaves no room for this. The army is now trying is to influence a change
in the formula for dividing the revenue between the Federal government and provincial
governments, demanding that its budget be deducted directly from the divisible pool of revenue.
[154]
 It is unlikely that Khan or the Opposition will resist the military’s demand for more resources;
historically, such moves have proven to be politically unwise. [155]  Unfortunately, if Khan does
accede to the military’s demands, he will further reduce the financial space to initiate development
schemes, thus damaging his political standing.
VI. CONCLUSION
Over the last few years, the Pakistani military has come to see the economy as an essential
component of national security. Further, the top brass views the current problems as not being
structural but managerial. Both the de facto finance minister and governor of the SBP are reportedly
the Pakistan Army’s choice. With the induction of the army chief into the newly formed National
Development Council, the military can now participate in economic decision-making. [156]  As the
economic crunch worsens, the military’s focus on national security will heighten, leading it to be
 more aggressive on its efforts to control the economy. Thus, the military’s dominance over the
political system will only increase in future.
With the military embedding itself deeper into the state structure of Pakistan, there is little hope for
any initiative from Pakistan to reduce tensions with India. However, the country’s economic
vulnerabilities present India with an excellent opportunity to develop new levers to mount pressure.
To seize this, India must first recover from the economic setback caused by the pandemic. Pakistan
will be hard-pressed to rationalise its defence expenditure, which consumed nearly 70 percent
(including defence pensions) of the net revenue of the federal government in FY19. [157]  Given Imran
Khan’s stance against his Indian counterpart, it is evident that Pakistan has no intention of
tempering its aggression in the region. If tensions continue to run high, the Pakistan Army is likely
to extract whatever resources it can to sustain its confrontationist approach and maintain strategic
parity with India. From India’s point of view, Pakistan’s relentless indulgence in a ruinous arms
race can prove to be beneficial.
Pakistan should translate the catastrophic COVID-19 crisis to an opportunity for undertaking
reforms in its economy, polity, and foreign and security policy. Failing this, the country will face
the prospect of further deterioration in its economy. The increase in poverty and unemployment will
fuel political and social unrest; this, in turn, could destabilise the government and threaten whatever
democratic progress Pakistan has made so far. 

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