Aside from various transnational and domestic issues that have prevailed in Pakistan, COVID-19 has posed a new challenge for the country’s developing economy. The outbreak of corona virus can be tracked back to November 2019 in Wuhan, China. In the span five months the virus had become viral enough to be considered as a global pandemic by the world health organization on 11th March 2020.
The global spread of the virus has put forward an array of obstacles that every nation has had to face. The most detrimental obstacle being the uncertainty that has been injected into the global economy, this obstacle is also the one that yet has to unravel itself completely. Economists are in awe while trying to predict the post effects of this novel economic climate. Meanwhile, the world remains conflicted upon the approaches taken by policy makers to defuse this plight. In any case, one thing is certain that the world as we know it has seized to exist and a new modus operandi is required to ensure a smooth transition out of this mare’s nest.
The coronavirus pandemic has a variety of consequences beyond the spread of the COVID-19 disease itself and efforts to quarantine it. Concerns have shifted from supply-side manufacturing issues to decreased business in the services sector. The most prominent and primary consequences of the COVID-19 pandemic on the economy is the reduction of business activity, unemployment and the risk of famine due to a geographical and economic smart lockdown. Supply shortages are expected to affect a number of sectors due to panic buying, increased usage of goods aggravating the pandemic, and disruption to factories and logistics in China, in addition, it also led to price gouging due to a demand and supply shock orchestrated by the economic lockdown.
For consumers, one of the most prominent economic impacts is inflation which articulates itself from a variety of instruments among which are foreign exchange, trade, the strain on FOPs due to overconsumption, hoarding and the reduction of local business activity. To begin off, developing economies usually don’t have enough or efficient resources to be self-sufficient causing certain sectors to rely upon imports for a variety of products but the most crucial being raw materials.
Fig. 1.1 (Predicted World Trade Volume)
In Figure 1.1 we can see a predicted world trade volume graph. Due to a limitation on international flights and worldwide trade embargos we can potentially see the global economy leaning towards a pessimistic scenario. East, being relatively under developed compared to the west, can potentially see a fall in trade ranging from 13.5%-36.2% (scenarios simulated with WTO Global Trade Model).
Developing countries usually aren’t self-sufficient and are dependent upon imports of goods and services such as raw materials and oil. Due to the global trade embargo nations are unable to produce the goods and services required which halts economic growth. Pakistan, as a developing nation also faces this issue as the raw materials it requires to run sectors such as textile are not obtained leading to companies downsizing which in effect causes unemployment.
Similarly, developing nations are heavily dependent upon exports as well. Pakistan being an agricultural economy will take a toll as this would stem its economic growth and reduces the injections into the economy which usually helps farmers to expand their farms. We would see a decrease in the inflow of foreign exchange due to this as well causing a dominos effect as it would make imports more expensive. Due to this Pakistan would see its GDP growth decelerate to 2.6% in FY2020 as ongoing stabilization efforts further curtail economic activity, according to the Asian Development Bank. Pakistan’s current account deficit has also taken the toll as it has narrowed sharply by 5.8%. Pakistan’s Ministry of Commerce has estimated that the exports might face losses up to $4 billion as export target might face reduction from $24 billion to $20 billion till July 2020. This would be detrimental for various businesses which seek the foreign market for revenue.
The Pakistani government has implemented fiscal and monetary policies to give relief to the general public. However, such policies have been accompanied with widespread criticism. To name a few, the attempt to increase government spending has an opportunity cost. Pakistan’s agriculture is expected to see slow growth due to a locust infestation which would make it harder for the government to cope with it due to the opportunity cost posed by COVID-19. Pakistan’s initiative to provide stipend to those living in poverty has negative consequences as well, the federal bank has to increase money supply which along with the increase in aggregate demand causes demand pull inflation and strains the already shocked supply chain. The reduction and interest rate although stimulates the economy, however, it discourages investors and causes the outflow of hot money from the country making its FE worse. Figure 1.3 further illustrates this.
This pandemic has also taken a grave toll on public companies as the stock market crashes due to panic selling caused by the uncertainty of the future economic climate. This has a great toll as businesses which were already suffering due to a lack of economic activity now have a minimal market cap as well which forces them to either shut down their businesses or downsize which causes unemployment and a reduction in GDP. The correlation between Covid-19 and the decrease in world market cap can be seen in figure 1.2. The crude oil market crash has also caused panic and uncertainty as it creates ambiguity for the petro dollar. As USD is considered to be a global currency its crash could potentially out bring the fall of the global economic system as people lose confidence in ‘fiat’ currencies and invest in alternatives such as gold and digital currencies.
Fig 1.3 (Demand Pull Inflation)
Fig 1.4 (Cost Push Inflation)
As previously stated one of the most prominent consequences for consumers would be inflation. In Pakistan inflation is projected to accelerate to 11.5% in FY2020, reflecting a sharp rise in food prices in the first part of the fiscal year and a 9.8 percent drop in the value of the local currency against the US dollar. Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as “too much money chasing too few goods.” Cost-push inflation is a type of inflation caused by substantial increases in the cost of imported goods or services where no suitable alternative is available. It stands in contrast to demand-pull inflation as can be seen in figure 1.3. The increased demand for certain goods and services such as health care, surgical masks, covid19 tests along with the supply shock will bring about demand-pull inflation whilst the increased cost of production for producers will bring about cost-push inflation as can be seen in figure 1.4. Cost-push inflation will also be detrimental for the GDP as can be seen by the graph. Pakistan’s GDP is expected to fall by 4.64% due to this pandemic.
The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions. The boundary of the PPC shows economic growth. If the quality or quantity of FOPs is decreased then the curve will shift inwards illustrating a recession. Due to the reduction of economic activity, both the quality and quantity of FOPs are affected and as our resources aren’t efficiently due to a variety of reasons among which could be that people working from home won’t be as efficient as they could bringing about a downward movement in the graph as well. This is caused by the poor allocation of resources as can be seen in figure 1.5.
A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy’s general price level. Due to less production due to the lockdown, this is imminent and would worsen with time due to the strain on scarce resources. This is illustrated in figure 1.4 as well and bring about inflation. Price gouging and hoarding of goods and services deteriorate’s prices as well.
Taking into consideration the trickledown side of economics refers to the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term. This could potentially lessen the wealth gap and have an imminent increase in the collective quality of lifestyle. The lack of economic activity limits the trickledown theory to function as the rich aren’t receiving money for it to trickle down onto the poor which can have consequences such as unemployment.
Fig 1.5 (PPC)
In order to safeguard the economy from such steps; aside from the previously mentioned measures, the following steps can be taken. The protectionist policy should be put into place to ensure that the books balance the FE is conserved. Investment in R&D and education should be made to work towards a vaccine, health care system should be subsidized, a proper rationing system for G&S should be put into place, education should be made more innovative to produce more skilled individuals to cure this virus, support businesses by giving them tax breaks and subsidies to ensure economic activity, essential industries like electricity should be allowed to operate. SSP should be adopted to stem the supply shock, essential G&S like masks and sanitizers should be overproduced and exported to gain surplus, and the spread of awareness about COVID19 should take place through advertisement. Taxes should be removed from the healthcare industry; tax rate should be reduced, an expansionary fiscal and monetary policy should be adopted, take strict actions against hoarding and price gouging. International flights and shipments should be suspended and people should be given incentives to stay home to flatten the curve. Work from home should be promoted; the world should work towards universal healthcare. World banks should be requested to give relief loans to developing countries. The economy should work towards implementing a platform similar to social security and give a stipend to the needy. Take measures necessary to accommodate those infected by building infrastructure and isolation zones and add more gold in the countries portfolio in case an economic recession takes place to benefit from the value of the gold increasing.