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Reuters archive photo.
The double defeat of Covid-19 and the fragile economy is bad enough, but this is the first economic crisis in Pakistan’s history for our informal economy directly, which in turn has been a shock absorber every time Pakistan experiences an economic crisis. The bad news is that things will get much worse. The good news is that we can get out of this stronger, if we play our cards correctly.
What is the biggest source of economic pain for the Pakistani economy due to the lockdown of Covid-19? Mass unemployment and a sharp decline in domestic consumption and exports. This is exacerbating an already fragile economy, where demand has been compressed over the past two years by raising interest rates and depreciation, to successfully make our current account deficit faster and bring medium-term stability to volatile rupees.
The government is trying to increase domestic demand by injecting cash and spurring economic activities through the Ehsaas Emergency Cash Program, which gives 12 million cash-vulnerable families to spur consumption while maintaining self-defense through locking. Opening the construction sector or engaging in large public works programs is also a way to create mass employment, while increasing domestic demand.
However, this is a time for bold ideas and large infrastructure programs taking time to come down, argues Uzair Younus, a senior non-resident colleague at the South Asia Center for the Atlantic Council, based in Washington DC. “The informal economy is at a disadvantage and it is important to get cash into the system,” Uzair said. “A quick way to get cash in the informal economy is to get involved in small-scale public works at the district level. This can be channeled through existing mechanisms that are used to provide MNA and MPA development expenses for their constituents. These funds can be used to build local roads, plant trees, etc. And allows unemployed workers to find work. “
This is a local policy recommendation, although the ruling party opposes the distribution of development funds through the MNA in principle, because of the potential to trigger political patronage. If we can launch this with transparency and effectiveness, this can be an important tool in the government’s Covid-19 response box.
There are also two opportunities that arise in the post-Covid-19 world order, which Pakistan can exploit to reform our economy. First, dramatically low oil and commodity prices (imported inputs) will create a buffer in our current account, even after considering a 15-20% reduction in exports and remittances. We must utilize this buffer and redesign global supply chains (due to US-China tensions) to attract foreign investors and allocate resources to new industries that meet the demand for products needed by the world compared to continuing to support our industries seeking rent, which results in allocations sub-optimal from our limited economic resources.
Second, the crisis opens opportunities where Pakistan’s geo-political superiority currently resides. The US will want to get out of Afghanistan even faster, which can help us secure debt relief in the interests of a stable region. China and the US are also locked in a battle for global influence (with the US stopping funding for WHO because it is deemed too pro-China) and this can be used by Pakistan to gain access to both their markets, attract investment and secure debt relief or rescheduling.
Finally, it is time for Pakistan to renegotiate our social contract; to spend more on health care, social safety nets for the poor and connect Covid-19 bailouts for businesses to enter the tax net. Most governments only get one chance at the start of their terms of office to push through hard reforms. PTI only has a short time.
Published in The Express Tribune, April 19th, 2020.
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