Ever since the Covid-19 pandemic hit the globe, several international institutions have given various

estimates about economic losses to different countries.

For Pakistan, a few estimates have been made by key financial institutions, which forecast the country’s
economy will contract by up to 1.5%. However, a local business school has painted an even gloomier
picture for calendar year 2020 in case the lockdown persists for nine months (March to November).

In a worst-case scenario, the think tank of Lahore School of Economics (LSE) has estimated that Pakistan
may post a GDP loss of 5.5% if the lockdown continues for nine months. Utilising a general equilibrium
macro (GEM) model, the LSE found that as a result of a three-month lockdown (March to May), Pakistan
may experience a 2.9% contraction in GDP growth in 2020.

“This will result in a loss of 1.5 million jobs by the end of the year,” the study stressed. “Out of this, 1.2
million informal jobs will be lost while 0.3 million professionals employed in the formal sector will be
rendered unemployed.”

Will GDP growth be negative in the current fiscal year? This is what all international institutions are
predicting. The head of the government economic team condescends. He may be trying to boost the
chances of debt relief. It was observed in in this column on February 1, 2013: “Pakistan suffered a
decline in its GDP only once in her entire history (1951-52). Even at the height of the Bangladesh crisis in
1971, GDP growth was positive at 1.23%.” Is 2019-20 going to be the second time?

Although the first two cases of Covid-19 were detected in the last week of February, the lockdown
affecting economic activity started in March. However, the economy was already strangulating under
the severest ever austerity regime. Except for December, the large-scale manufacturing showed a
negative growth every month during July-February period, with an overall average of -3%. As the
lockdown began to cast dark shadows on the economy in March, the sector shrunk by a massive 23%,
bringing the July-March growth to -5.4%. And the Covid-19 effect has only begun. That it will be worse
for April can be judged from a 53% fall in exports. Such is the state of a sector with relatively reliable
data during the year. It seems the year is likely to end up with a negative growth of around 7% for this
major component of industrial sector. Other components include mining and quarrying, small scale
manufacturing, slaughtering, electricity generation and distribution and gas distribution, and
construction.

Other than small scale manufacturing with an assumed growth rate of around 8% and slaughtering likely
to grow at 3%, all components are expected to grow negatively. As a whole, industrial growth will
probably be around -6%.
In agriculture sector, the largest component of livestock is likely to post a positive growth of around
3.5%, despite the falling chicken and milk prices. Crops, the second largest component, recorded
negative growth last year. It is likely to reverse this year due to a low base and a reasonably good wheat
crop of 25 million tonnes, despite rains and locust attack. A 4% growth is a possibility. Cotton ginning
and fishing are signalling negative growth. As always, agriculture should save the day by contributing an
overall growth of 3-4%. Commodity production sector comprising industry and agriculture is likely to
remain in the red at around -0.8%.

Services is the largest sector of the economy; it also hides a lot of informal activity and thus amenable to
fudging. The most documented components are finance and insurance and general government
services. The former has made supernormal profits under the overly high discount rate regime and the
latter has never displayed negative growth. It got a fillip in the Rs1.2 trillion relief package. In transport,
storage and communication, transport gets an obvious hit but storage due to the expected good season
for wheat and communications being the most thriving business during the socially distanced
environment, will have a positive growth of 2-3%. Wholesale and retail trade has direct correlation with
the commodity production sector. A negative growth of 2.5% may be expected. Serious data issues in
the components of housing services and other private services leave opportunities for creative
accounting. In the past 20 years, these components have not witnessed negative growth even in the
worst of times. A safe bet this time is growth rates of 6% and 7%, respectively.

Adding it all up in proportion to respective weights in the national accounts, the GDP growth rate for
2019-20 is likely to be positive and in the range of 0.2-0.6%.

Published in The Express Tribune, May 15th, 2020.

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While major international financial institutions have predicted a worrying 1.5% contraction for
Pakistan’s economy due to the rampaging coronavirus pandemic, a local business school, the Lahore
School of Economics, has painted an even worse scenario — 2.9% to 5.5% contraction in GDP,
depending on the length of the lockdown. These projections are a serious cause for concern — both for
the rulers and the ruled. Unfortunately, while developed economies can still survive and recover from a
sizeable one-off contraction, for a developing country like Pakistan, it could be a death knell.

Pakistan cannot sustain a recession, let alone a prolonged depression, which looks to be the case
according to this projection by the LSE. The worst-case scenario assumes lockdown conditions will
persist until November, while the ‘best case’ assumes the lockdown will be lifted this month. The LSE
projections also warn of 1.5 million to 2.8 million jobs lost, and of them between 300,000 and 500,000
would be from the formal sector, and the rest from the informal sector.

The primary difference between the LSE’s modeling and those from the World Bank and others is that
the former is made by adding a supply shock to the model, followed by a demand shock. This is based on
the theory that like major crises such as the Great Depression of 1930s, the Asian financial crisis of the
1990s, and the 2008 financial crash, the current situation was caused by a supply shock event, namely,
production cuts effecting non-medical and other non-essential sectors of the world economy. That shock
would create a loss of income for workers which would, in turn, lead to a demand shock caused by
reduced consumption and investment.

We can assume that this cyclic condition would continue until a new normal is reached, or a successful
intervention breaks the cycle. While we appreciate the hard work of our local scientists and researchers,
we also fear what would happen if, on this occasion, they are right. Regardless, the findings do provide
food for thought for the government. If the economy is not given proper support, it may take years, not
months, for a recovery to begin. 

Published in The Express Tribune, May 15th, 2020.

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