1. The Covid-19is such a public-healthcrisisthatithasincreasinglybecome aneconomicthreattoevery
economyof the world,as bothproductionandconsumptionlevelsare simultaneouslyscaledback.
Concomitantly,interruptioninglobal supplychainsand transportation,aftermajorlockdowns,has
resultedintoasharpdecline ininternational trade of goodsandservices.Ithaspushedthe global
economyintoa deeprecession.IMF’sWorldEconomicOutlookhasdecelerateditsearlierglobal annual
economicgrowthforecastfor2020 fromof 3.3% to below zeroin2020 due to coronaviruseffect.This
will resultintoadecline of global incomebyabouta trillion-dollarandevenbeyondif crisisprolongs.
The ultimate effectwouldthusdependon:how farandfast the virusspreadsandhow effective policies
will be incontrollingthe damage toeconomicandsocial well-being.If the virusoutbreakisshort-lived
thena standard mix of monetarypolicies(e.g.,acutinthe policydiscountrate) andautomaticfiscal
stabilizers(e.g.,adjustmentintax ratesand transferpaymentstosmoothincomes,consumption,and
businessspending) shouldbe sufficienttoreduce adverse impactsonthe economy.Butif the crisis
prolongs,thatnowappearsto be the likelycase due to supplydisruptionsowingtomalfunctioningof
productionandsupplynetworks,thenthe economicrecoverywill dependmore onsustainedliquidity
injectionstoindustriesbythe central bank,andpro-active fiscal,trade andinvestmentpolicies.In
addition,the lossof consumerandinvestorconfidenceisthe mostimportantfactoraffectingthe
businesssentiments;whereasassetsprice deflation,weakaggregate demand,increaseddebtdistress,
and risingpovertyandincome inequalitywouldposeevenbigger policychallenges.1Professorof
Economicsand DeanResearchat School of Social SciencesandHumanitiesNational Universityof
SciencesandTechnology,Islamabad4In view of the above perspectives,aneffective response fromthe
governmentincoordinationwiththe private sectorrequiresaproactive andtargetedapproach.STATE
OF THE EXTERNALECONOMY: In the secondhalf of 2019, justbefore the outbreakof the Covid-19crisis,
Pakistansawsome signsof economicrecoveryespeciallyinitsexternalpart of the economy.The
countryrose 28 placesonthe World Bank’sEase of DoingBusinessindexcomparedwith2018,
graduatedto amongthe world’stop-10 countrieswiththe mostimprovedbusinessclimate,volatilityin
exchange rate became minimumasovervaluationof the rupee wasreduced,andChina-PakistanFree
Trade Agreementbecame operational from1stDecember2019, whichgrantedsimilaraccesstoChinese
marketas Chinahas accordedto ASEAN countries.There wasalsoevidence of increasedFDIparticularly
fromChinese textilescompanies.Thiscreatedaconfidenceamongdifferentstakeholdersthateconomy
mightfurtherimprove in2020 on bothinternal andexternal fronts.Butnoone predictedbythe endof
2019 that COVID-19will bringwide-spreadlockdowns,transportrestrictionsandsocial distancingwill
haltsupplychains,all of whichwill create devastatingconsequencesforbusinessactivities.Both
demandandsupplyside disruptionhave startedadverselyaffectingthe external sectorandacurrency
crisisislooming.Bynowit iswell knownthatthe CalendarYear(CY) 2018 was an extraordinaryyearfor
Pakistan’scurrentaccountbalance whenitfaceda deficitof $19.482 billion(see,figure below).The
presentGovernmentdecidedtocurtail itdrasticallybyintroducingimportrestrictionsacrossthe board.
It was successful inreducingthe currentaccountdeficitto$7.315 billioninCY2019 but onlyby reducing
importsby19% (all groupsof importeditemswitnessedadecline exceptpetroleumandchemicals
groups) andattracting 5.3% additional remittancesthanayear earlier(i.e.,remittanceswas$22.20
billioninCY2019). Onthe otherhand,exportsinsteadof risingdeclinedby0.24% inCY2019. There wasa
minimal increase inthe exportsof textile andpetroleumgroupsbutthese were offsetbya decline in
exportsfromfoodandothermanufacturedgroups.Thiswasbecause noconcertedpolicyeffortwas
2. made by the governmenttopromote exports.Sincethe fourthquarterof 2019, however,there have
beensome positivesignsof exportgrowthandafurtherdecline inimports.Duringthe firsttwomonths
of 2020 bothexportsandimportsincreasedfromthe previousyear’slevelsbutcurrentaccountdeficit
declinedmore sharplyinFebruary2020. We don’thave data at thistime forMarch 2020 to assessthe
COVID-19impact onPakistan’strade.All thatwe know aboutthe current situationissome information
obtainedfromindustrysourcesandexportsfirms.5Figure 1 Pakistan’stextilesectorwasworkingatfull-
capacityproductionafterthe governmentwithdrew dutiesandtaxesonimportof the raw cottonin
January2020. Besides,PakistanstartedgettinghigherexportsordersmostlyfortextileswhenChinawas
fightingagainstthe coronavirus.The worldtextile buyersthendivertedtheirpurchasingordersto
PakistanfromChinawhose 70-80% productionwasdisrupted.ItwasthenpredictedthatPakistanwould
comfortablyachieve itsexporttargetof $24-25 billionforthe FY2020. Pakistani industrystartedclaiming
that itdoesnot have the extraproductioncapacityto take and meetadditional exportorders.Butthis
euphoriaturnedouttobe short-lived.Chinaisbackon itsfeet;withthatPakistani exportfirmshave
startedlosingexportorders.Pakistanisamong the countriesmostaffectedbythe global effectsof
China'sslowdownthroughdisruptionof global supplychains.The slowdowninmanufacturinginChina
has createda ripple effectonitseconomicactivities.The textile sector,whichaccountsfor55% of total
exports,iscurrentlyfacingafall inimportsof the majorityof the raw material –dyes& chemicals–that
are requiredtoproduce textilesandare mostlyimportedfromChina.Inviewof the situation,All
PakistanTextileMillsAssociation(APTMA) hasstarteddemandingfromthe governmenttotake
immediate stepstoaddressmajorissuesfacedbythe industryespeciallyitsliquidityproblem.It
demandstorelease the backlogof salestax refunds.APTMA hasalsodemandedadditional linesof
workingcapital andfreezingof utilitybillsforatleasttwomonthsto duck the closure of industry.
Suddencancellationandpostponementof exportsordersmeansincreaseinoutputinventoriesthatwill
impose enormouscostonindustry.Importershave delayedmore than50% of ready-to-shipmentexport
orders.Consequently,industrieshave startedlay-off of theirdaily-wage and050000 100000 2005 2007
2009 2011 2013 2015 2017 2019 Million$ Year TrendsinExports& ImportsImportExport6 temporary
workers.Industry isincreasinglyunable topaytheirworkersdue toliquiditycrunchamidstnon-payment
of salestax refunds.If crisisprolongsthenindustryforesee muchmore lay-offs.Assoonasthiscrisis
started,Pakistanlostmostof the Hot moneythat flowedintoitsreservestomake highprofitsfromthe
deliberatelykepthighinterestrates.Withforeigncurrencyreservesdepletingsharplythe rupeehaslost
about7% of its value.All of the above developmentswill likelyhurtexports.Debtburdenhassofar
increasedbyRs.600 billion.FDIisdecliningtoo.There isapossibilitythatPakistanseekspostponement
of debtpaymentandperhapsnewloanstomeetthe balance of paymentsobligations.
