Pakistan's GDP may contract by more than 4% due to trade disruptions alone

ISLAMABAD: Pakistan’s economy is projected to face a loss of up to 4.64% of its gross domestic product (GDP) due to disruptions in trade caused by the lockdown imposed in provinces due to the outbreak of coronavirus, reportsThe News.

The loss was projected by the Pakistan Institute of Development Economics (PIDE) after it was instructed by the Planning Commission to come up with estimates of COVID-19 losses on account of GDP growth.

The PIDE presented three different scenarios. In the first case, it said GDP will contract 0.30% in case imports reduce by 2%.

In the second scenario, GDP may contract 2.3% due to a reduction in imports and exports by 10%.

In the last scenario, the institute has said that GDP will contract 4.64% if the reduction in imports and exports is up to 20%.

The PIDE, under the supervision of its vice-chancellor, economist Dr Nadeem-ul-Haq, has estimated that in the first scenario, when there is only a 2% fall in imports, the overall loss to GDP would be negligible.

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However, in the second scenario, a 10% decline in intermediate and capital goods is likely to bring a major fall in investment as well as a similar reduction in exports, which would result in a loss of 2.3% of GDP in the fourth quarter of FY2020. A 20% decline in export and import is estimated in the third scenario and the GDP loss would be 4.6%.

It is pertinent to mention that the institute only took into account the impact of trade disruption on GDP and did not consider the impact of the internal lockdown.

PIDE also did not take into account the potential decline in foreign direct investment (FDI) and remittances, and disruptions in other sectors such as aviation, tourism and hospitality, etc.

It noted that countries around the world have started experiencing the negative economic impact of COVID-19. Countries that are part of the global value chain (GVC) would feel the hit even if the spread of coronavirus is mostly contained and does not disrupt the internal functioning of an economy.

Although Pakistan may not rank high on the GVC, the country has enough integration with the global market to feel the impact of an international slowdown in economic activity.

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The five major trading partners of Pakistan with more than 50% share include China, USA, UK, Japan, and Germany. Four of these are the worst-hit countries by COVID-19.

There have been significant disruptions in international trade flows of these countries. China and Japan experienced more than 15% reduction in their exports. Rest of the three partners had a reduction of around 5%. Some of them have also experienced reductions in their imports.

The USA and China are the major importing partners and we heavily rely on them for the import of capital and intermediate goods. These raw materials are then utilised in the production of final goods for exports and domestic consumption.

Similarly, being our major export partners, any economic downturn to these economies may face, would directly affect our exports as well as our GDP.

It is interesting to see that in post-COVID outbreak in China, Pakistan’s exports to other major partners were on the rise in February. This could possibly be because of the trade halt of these countries with China as it closed its border and stopped trade with the world. The resulting vacuum was filled by Pakistan through exports to these countries.

This trajectory, however, may not continue in the coming months because of: (i) disruptions in our imports of intermediate and capital goods; (ii) China is recovering from the outbreak; and (iii) demands reduced by the partner countries due to deterioration in their economic activities.

We can also see a decline in our imports from Germany and the UK. If we have data for China for February and March, we would also see decline in imports. All this can have detrimental effects on our economy. There are 32% of our imports that are in the form of final goods. Reduction in these would not affect the GDP.

However, the rest of 68% constitutes the raw material, intermediate goods, and capital goods. These are used to produce final goods which are then consumed domestically or exported to other countries. A decline in these will therefore have a negative impact on investment spending as well as on exports. Consequently, the country will experience losses in GDP.

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In conclusion, the PIDE stated that they presented the very preliminary estimates of likely impacts of the trade disruptions caused by the emerging corona affected economy. It is almost certain that the 4th quarter growth will be negative and could be as high as 4% even in these preliminary estimates. More than likely as things emerge there will be a larger negative impact on the economy. After all, the corona is a big event, where any previous estimates will no longer be valid.

It is worth noting that there has been much policy and business talk on diversification but without real progress on that front. Our dependence on commodity exports with falling commodity prices amid Covid-19, shock and reliance on intermediate products for export productions on importing countries such as China would hurt our exports. Resilience to such shocks could have been built if domestic commerce and supply chains had been built to lead to the diversification of exports.