Coping with Balance of Payment under COVID-19 in Pakistan

By Salman Ahmed Shaikh

External debt servicing and trade deficit put pressure on the country’s foreign reserve and exchange rate repeatedly. After entering the recent IMF program to source $6 billion in 2019, the country had to face stringent guidelines to increase tax collection, reduce subsidies, keep the tight monetary policy and let the exchange rate float freely in the market.

Initially, the government managed the balance of payment crisis by increasing import duties and depreciating rupee. However, with a possible decline in exports, remittances, and investment due to Covid-19, the country faces another impending balance of payment crisis if external debt servicing and the import bill do not decline significantly.

So far, remittances increased by 6% to $18.8 billion in 10MFY20, i.e. July 2019 to April 2020 period. Nonetheless, a drop in oil prices will result in loss of jobs to overseas workers in the Middle East. Most of our workforce in the Middle East are employed in blue-collar jobs in construction and energy sectors. Since these sectors are going to be hit badly, the overseas workers will face layoffs and it will decrease remittances back to Pakistan.

In addition, Pakistan also has many of its overseas workers engaged in blue-collar jobs in countries like Italy, Spain, the UK, Germany, and France. Many of them have activity-based work and earn their livelihood on a daily basis. Even if they are engaged in small businesses like in East Asia, their businesses are in retail which is badly hit during the lockdown period.

With good performance in the early months of the outgoing FY20, foreign direct investment went up by 126.8% to $2.281 billion in 10MFY20. However, going forward, attracting fresh foreign investment in a short period is difficult even with policy incentives. Foreign portfolio investment could potentially come to the stock market at the current attractive valuations, but very few people are convinced that markets have bottomed out and hence investors wait unless they have lucrative incentives like significant decrease in capital gains tax.

Exports could have had a cushion in a scenario where the pandemic had remained in China. But the epicenter is now Europe and America where most of Pakistan’s exports end up. Pakistan’s textile exports plummeted 65% in April 2020 alone.

Realignment in product mix can help the textile, pharmaceutical, surgical goods, cement, processed food, and hygiene industry. The textile industry can produce goods that are used in hospitals and medical care, such as towels, bedsheets, face masks, handkerchiefs, and suits worn by medical practitioners and patients, for instance. Pharmaceutical companies can meet the demand for antibiotics, anti-viral, and other medicines not only for the local market but also for neighboring countries. The surgical goods industry can also join the global value chain and supply the surgical instruments used in intensive medical care.

In such a scenario where remittances, foreign investment and exports will take a hit, it is important to seek relief from foreign lenders to provide debt relief in the form of deferment, if not waivers. Secondly, it is important to look inward and mobilize local resources to produce goods previously imported. Pakistan has a workforce hungry for work even at lower wages and businesses that are anxiously looking to survive. Falling oil prices have provided an opportunity to become competitive. A further decrease in tax cuts in the upcoming budget and finance bill can help revive local industries to meet at least the domestic demand of goods which we can produce locally.  

To cope up with these difficulties, the policy mix should have tighter import controls on non-essential goods, decrease in interest rates, decrease in capital gains tax on shares trading, tax cuts for labor-intensive manufacturing industries other than construction too, lobbying for external debt deferment, concerted efforts for sourcing foreign aid, donations mobilization from overseas Pakistanis and more impetus on the flow of remittances through formal banking channels.

 

The opinions in this article are the author’s and do not necessarily represent the views of Mettis Link News (MLN). The author is a PhD in Economics and can be contacted at: salman@siswa.ukm.edu.my

Posted on: 2020-05-28T13:21:00+05:00

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