THOUGH an exogenous shock, coronavirus has brought nations face to face with the stark choice between living with economic stagnation and poverty for an unforeseeable future or using the opportunity created by the virus to transform the economy and lives of the teeming millions.

The initial swift response of governments, including Pakistan to the Covid-19 outbreak, indicates that the pandemic is acting as a catalyst for a virtuous change, raising some hope in an otherwise dismal environment. The worldwide stimulus and relief packages for households and firms have reached $8 trillion and more are likely to come. In Pakistan, it has also prompted the central bank to move towards easing of its tight monetary policy. The urgency and priority is about protecting the lives and livelihood of people.

Even prior to the outbreak of the pandemic, one could witness global clamour on the need for social inclusion, widening social safety nets, alleviating poverty, reducing unemployment, ensuring distributive justice, evolving policies for common good and creation of a common interest state, etc. With economic growth not producing enough jobs many countries initiated universal basic income scheme.

The pandemic is acting as a catalyst for a virtuous change, raising some hope in an otherwise dismal environment

Prime Minister Imran Khan won the elections by espousing egalitarian causes including the building of five million low-cost houses and creating 10m jobs. The promise for building a new Pakistan by the prime minister, for which earlier Zulfikar Ali Bhutto struggled with a different programme, was about transformational change.

All previous global crises in the past few decades have been tackled with utmost speed. But the imperatives of real virtuous change were ignored in policy actions only to alternate between fragile growth and instability. But this time there is a big risk that the creeping recession could turn out to be one of the worst in the world.

Such episodes destabilise orthodoxy. According to the International Monetary Fund (IMF) estimates, the size of Pakistan’s economy has already shrunk to an estimated Rs42tr against the pre-virus projection of Rs44tr.

Deviating from its known stand, the IMF has supported Pakistan’s stimulus package for opening the labour-intensive construction industry, including tax amnesty to those investing primarily in housing building, where daily wage workers could be absorbed. IMF resident representative in Islamabad Teresa Daban Sanchez says the Fund will also work with the authorities on how to develop a roadmap to face the socio-economic challenges posed by Covid-19 and make it a part of the budget next year. Pakistan has a labour force of 63m of which 46m work in the informal sector where wage workers are the most vulnerable to lose jobs.

In a related development, Finance Secretary Naveed Kamran told a parliamentary committee on April 21 that the government had allocated Rs200 billion for financial assistance to daily wage-earners/employees of small enterprises. The disbursement could not be made earlier for want of foolproof selection and distribution mechanism, now stated to have been put in place.

The construction package should have come much before the outbreak of the virus. Now the cautious estimates put the job losses at around three million, says Planning Commission Macroeconomics Section Chief Zafarul Hasan Almas, adding that the figure could jump to five million in the worst-case scenario.

In the case of Pakistan, both output and job creation would suffer because of declining development sending. The IMF estimates that the consolidated development expenditure for the current year would be by down by 34 per cent to Rs934bn compared to the pre-virus estimate of Rs1.437tr as most of the fiscal indicators come under stress, missing targets. The primary deficit will climb up to 2.7pc of the GDP from the original projection of 0.7pc this year.

Looking at the big picture, critics say Pakistan has no long-term policy for employment creation. They say Islamabad should implement the ILO Employment Policy Convention which requires every member state to declare and pursue, as a major goal, an active policy designed to promote full, productive and freely chosen employment with a view to stimulate economic growth/development and raise the standard of living.

In the backdrop of the emerging scenario, financial analysts and businesses are pressing the State Bank of Pakistan to pursue a loose monetary policy. Despite the aggressive steps taken by the central bank, they argue there is still room for adjustment in the monetary policy to stimulate the economy.

The debt-to-GDP ratio is projected by the IMF to deteriorate to 90pc, up from 85pc estimated prior to Covid-19. Each rupee depreciation vis-a-vis dollar adds Rs100bn to the foreign debt. Similarly a high discount rate raises cost of domestic debt servicing. It is time to return to the earlier established practice of linking the discount rate to core inflation as opposed to the headline inflation, a deviation made after the IMF staff-level agreement of May 12, 2019.

Published in Dawn, The Business and Finance Weekly, April 27th, 2020