May 31, 2020 (MLN): As Covid-19 spreads globally, governments around the world have taken various measures to curb spread of the disease including complete and partial lockdowns, suspension of social gatherings, halting of public transport facilities, closure of schools and universities and adoption of work from home models.
All this has meant that the health emergency has also turned into an economic shock with both the supply and demand side effected.
In this context, the State Bank of Pakistan (SBP) has started a podcast series which aims to understand the economics of this shock by answering five broad questions regarding Covid-19 and its economic impact on emerging economies like Pakistan and how Pakistan has and continues to respond to the Covid-19 crisis.
In the first Podcast, SBP laid its focus on the first question that how Covid-19 may impact an economy like Pakistan by saying that it is primarily a health emergency which has eventually turned into an economic shock. This shock has affected emerging markets like Pakistan through various channels both external and domestic.
External channels include the slowdown of international trade, workers remittances and financial flows, however, it has also brought some respite for oil importers in the form of lower oil prices, explains SBP in a podcast.
Domestically, SBP elucidates that heightened uncertainty has adversely affected consumer demand, business activity, investment as well as government revenue in emerging markets.
To fight the pandemic, governments around the globe have imposed lockdowns of varying degrees. This has led to lower mobility and higher unemployment, resulting in reduced household consumption, this in turn has created cashflow problems for businesses and factories.
If this loop continues for too long, it could lead to businesses filing for bankruptcies and having to layoff workers. If the pandemic is prolonged, heightened liquidity issues and bankruptcies for firms might also translate into losses on commercial banks’ balance sheets putting the financial system under pressure, edified in a video.
Overall these macro financial linkages could further amplify the impact of the covid-19 shock on domestic economic activity. In case of external channels, the covid-19 shock has adversely affected global economic growth and global trade.
Video further enlightened that for emerging markets this has resulted in cancelation or delays an export orders and disruptions in international supply chains. Moreover, the slowdown in advanced and oil producing economies is upsetting remittance inflows to labor exporting countries. In addition, heightened global risk aversion has badly affected capital flows to emerging markets.
All these factors translate into a reduction in forex reserves, currency depreciation, pressure on the budget and a slowdown in economic growth in emerging markets like Pakistan.