Economic Impact of Coronavirus

Sara Malkani

A UN report says that developing countries, including Pakistan, will be hit hardest by the economic shockwaves caused by the novel coronavirus crisis that has shaken the world and will need a support package of up to $2.5 trillion to cope with the damage. According to the report, Pakistan, Argentina and the Sub-Saharan African countries would face a “frightening combination” crises including mounting debts, a potential deflationary spiral as well as a disastrous impact on the health sector.

Their economies will take “enormous hit” from high capital outflows, lost export earnings due to falling commodity prices and currency depreciations, with an overall impact likely worse than the 2008 crisis.

In an early sign of the impact, portfolio outflows from main emerging economies were $59 billion a month between February and March compared to $26.7 billion in the immediate aftermath of the 2008 crisis. Besides a $2.5 trillion support package this year to face the economic crisis, other measures will include a $1 trillion liquidity injection and a $1 trillion debt relief package and another $500 million will be needed for emergency health services and related programmes, on top of capital controls.

The figures in the report titled “The Covid-19 Shock to Developing Countries” echoed an earlier estimate by the International Monetary Fund. UNCTAD considers around 170 countries to be developing but the financing gap figure stripped out China and South Korea. Leaders of the Group of 20 major economies recently pledged to inject more than $5 trillion into the global economy to limit job and income losses from the coronavirus and “do whatever it takes to overcome the pandemic”.

In the meantime, the International Monetary Fund has announced that it would consider Islamabad’s request for financial assistance under IMF’s Rapid Financing Instrument (RFI) facility to shore up the country’s foreign exchange reserves and budgetary support in the wake of the adverse impact of the coronavirus pandemic on its economy. Last week, Adviser to the Prime Minister on Finance Dr Hafeez Shaikh announced that Pakistan had arranged about $4 billion additional financial assistance from multilateral lending and aid agencies, including $1.4bn additional funds from the IMF. Soon after the announcement, Ms Georgieva confirmed Pakistan’s request for financial assistance to ensure prompt and adequate relief to the people and the economy. This emergency financing, the IMF chief said, would allow the government to address additional and urgent balance of payments needs and support policies that would make it possible to direct funds swiftly to the country’s most affected sectors, including social protection, daily-wage earners and the healthcare system.

It may be added here that Prime Minister Imran Khan and his government had swiftly approved an economic stimulus package aimed at containing the spread of coronavirus and providing support to the affected families and businesses. Similarly, the State Bank of Pakistan has adopted a timely set of measures, including lowering of the policy rate, new refinancing facilities to support the flow of credit, and temporary regulatory relief measures. Significantly, in the give circumstances, the authorities in Pakistan have reaffirmed their commitment to the reform policies included in the current arrangement under the Extended Fund Facility (EFF). These reforms are crucial to boost Pakistan’s growth potential to deliver broad-based benefits for all Pakistanis, especially the most vulnerable segments of the population.

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