Where Are We Headed?

Spearhead Analysis-05.08.2020

The Corona virus seems to be receding in Pakistan, though not globally, so the danger of a resurgence remains if safety protocols are not enforced. It seems that our preferred response is to avoid a full scale lock-down that brings life to a halt and bank on selective lock-downs, enforced safety protocols and special arrangements during high intensity activity periods like the just passed Eid ul Azha and the coming Muharram. So far this strategy seems to be working. It seems that structures like the NCC and NCOC with NDMA have delivered good results. World-wide economies have taken a massive hit with a sharp spike in unemployment—the combination could spark social unrest. The return to normalcy will be slow even if a vaccine is developed and deployed. Pakistan is fortunate that its fatality rates have been low and this may save us from the worst consequences being faced elsewhere.

The steps that Pakistan took to save its economy included a well calibrated fiscal and monetary response with a 6.25 per cent reduction in the key policy rate. There was a massive Rs.1.2 trillion stimulus package and relaxations in loan repayments. Pakistan also managed to obtain emergency funds from IMF, the ADB the WB and the AIIB, in addition to debt relief. There has been devaluation of the Rupee against the dollar and this decline may continue in 2021—possibly with a further 5 per cent devaluation. There are hopes that the Current Account deficit will be managed and that inflation will remain within limits. The problem areas are the falling tax collection and the COVID related steep expenditures and this could negatively impact the budget deficit. The hope is that the agriculture and services sectors will improve and foreign remittances will continue to increase or at least stay on par. Exports remain in decline even though import restrictions have helped but this is not the answer. CPEC related activity is expected to pick up and the real estate and construction sectors are already on the upsurge because of a timely policy step by the government. Some innovative thinking is required to attract foreign funds because normal FDI is unlikely in the present energy, FBR, NAB and Bureaucratic constrained environment.

The stock market suffered because of panic selling in the wake of the Corona virus. The market has not recovered and uncertainty remains. The hope is that with controlled inflation and a low interest rate environment the stack market performance might improve. Going forward more and more people will be focusing on monthly income rather than asset accumulation therefore simple income solutions could attract domestic savings, which at present are woefully low.

According to the media the ‘Eid economy’ suffered a 50 per cent decline over the last year. This will have an impact on the rural population. The automotive sector remains a puzzle—there is a sharp decline in sales but a steady increase in prices with new makes entering the market and dealers asking for a premium on their unsold cars.

The successful development of a vaccine could change the global economic environment even if the vaccine is not available to all initially. This could happen by the end of this year or early next year. In Pakistan there are grounds for cautious optimism especially if the governance environment improves and political infighting stops. With opportunities in foreign relations the focus needs to be on the economy and political stability. The clean-up of Karachi with the assistance of NDMA is a step in the right direction. It is time to think on a National basis and follow an inclusive policy for the betterment of the country.

(Spearhead Analyses are collaborative efforts and not attributable to an individual)