Pakistan's Opportunity Strategy to Fightback the Pandemic, and Win!

Problem – Cash is King, And, is in Short Supply!

General Public is faced with two key issues at the moment in the wake of the Coronavirus Pandemic:

1.       Health Issue: It has become difficult for general public (common Pakistani in Pakistan's context) to have access to health supplies and facilities due to both, Covid-19 (existing health facilities being overwhelmed) as well as other regular on-going diseases.

2.       Financial Issue: An average person’s income is either stopped or suddenly declined (a potential run on savings), while his expenses are the same – Or, income decline is much faster than the corresponding decline in expenses, because everyone delays payments (hoards cash), hence reduced liquidity; approaching liquidity crunch with continuity in lock-downs.  

So underpinning the Financial Issue is ‘Liquidity’ that’s imperative to running vital organs of the entire ecosystem!

Liquidity is a function of ‘Inflows & Outflows’ that have begun varying for all Stakeholders facing the Pandemic:

a.       Public needs Liquidity – Cash for Food and Health, provided by businesses/government/ecosystem

b.       Business needs Liquidity – For running business operations/supply-chain, salaries, energy, interest, rental, taxes.

c.       Gov’t needs Liquidity (Fiscal Space) – Taxes/Borrowings to support spending/developments and repayments etc.

Impact – A Healthcare Crises Can Become an Economic Freeze!

        i.           Economic Loss: Due to the Pandemic, the economic health of the country is expected to weaken by US$ 15bn amid 10% potential decline in expected GDP in 4QFY20, because of complete/semi lock-downs, resulting in 0% real GDP growth FY20, at best, or over 2% negative growth in FY20, spreading over to 1Q next fiscal (worst case).  

       ii.           Job Loss: Highly expected outcome, since 1/3rd are already under the poverty line, while another 1/3rd are only slightly above/at it (lower/lower-middle class); so a total of 66%, or 145mn people nearing poverty, would need immediate liquidity support through direct (gov’t relief) and/or indirect relief (through all the businesses).

Action – Beyond Ordinary, But More Timely Than Perfect!

Since the Gov’t resources are already limited (Tax coming down further with expected shortfall at PKR 1.5tr, and Expenditure going up with PKR 2.0tr additional required for relief efforts), so, with potential fiscal gap reaching unprecedented levels (15% of GDP), this calls for some ‘unconventional, bold, beyond-ordinary, and timely’ Policy Actions^ for a stronger fightback; to not only support but to reset basis for future growth. Few detailed below:

Actions for timely financial support (outflows) vs source of financing (inflows) of these above actions, explained here:

Source of Outflows (point-wise impact explained)

1.       Government (directly/through various NGOs/Charities) to support the entire Informal Labor (unemployed from lockdown Day-1), with PKR 2.0tr covering 3 Months. Pakistan’s total labor is 75mn (WB/ILOSTAT Sep-19); 76%, or 57mn, is Informal (SBP Survey). Average monthly wage (highest scale for max impact) taken at PKR 12K (SBP).

2.       A fear that 30% layoff may take place in the formal sector due to prolonged lockdown (12mn Formal Labor net of Gov’t employees); impact on the Private Sector is calculated at PKR 189bn (3M Salaries: 12mn Formal Labor with PKR 17K/month per person taken as ‘lowest monthly average salary’, for calculating the minimum required).

3.       Private Sector Finance Cost worked out on total domestic loans to Private Sector i.e. PKR 6.7tr (SBP Dec-19) with current interest rates and prevailing loan spreads, which is estimated to be around PKR 258bn for 3M/1Q.

4.       Energy Cost (cut in utilities/petroleum product prices) to be passed on to Private Sector/Public to the tune of PKR 175bn in the wake of Oil price slump of over 60% in the recent months – huge support to gov’t taxes and levies.

5.       Government to cut Taxes/provide incentive to the vulnerable Salaried Class by 50%/PKR 67bn (6M of normalized tax collection of PKR 133bn from the Salaried in FY18 (tax was unusually cut in FY19; so FY18 was benchmarked).

Source of Inflows (point-wise impact explained)

1.       Interest Rate Cut to 6%, to create sufficient fiscal space for the Gov’t as it holds 77% (incl. PSEs’) of the entire Domestic Debt, so to have a quarterly impact of PKR 418bn (impact calculated at 7.25% cut, from 13.25%, to 6%).

2.       Rate Cut to 6%, to lessen the debt burden on the Private Sector as well, as the sector holds 23% of the entire Domestic Debt, so to have a quarterly impact of PKR 125bn (impact calculated at 7.25% cut, from 13.25%, to 6%). Currency parity to stabilize as CAD is forecast to benefit from decline in Oil, Food, and various outflows deferred.

3.       Once rate down to 6%, a 6M moratorium be granted to the Private Sector on total debt repayments; PKR 206bn.

4.       Interest-Free loans to be offered to the Private Sector (all micro, small, medium, and large businesses) by slashing 1% CRR (Cash Reserve Requirement) of banks; estimated at PKR 826bn (capital buffer is already cut though).

5.       Oil Price crash windfall; calculated at PKR 248bn for 3M at US$40/bbl price with 50% cut in demand incorporated.

6.       Gov’t to seek Moratorium on foreign debt repayments; conservatively taken only for 3 months worked out on country’s average annual foreign debt servicing; estimated at PKR 454bn for 1Q only, longer the better. Some write-offs on debts, if possible, would be best, though nothing has been assumed in this calculation, as such.

7.       Fiscal (deficit) support from donors (WB, IMF, ADB) at lowest rates possible. Best to try to receive more under the Aid & Grants than in Loans. It is estimated to be very low at US$ 500mn or PKR 83bn, could be a lot more (IMF already committed US$1.5bn immediate disbursement).

8.       Gov’t if negotiates with the IPPs over annual Power Capacity Charge, in the shape of moratoriums on interest payments/foreign currency payments; will not only ease PKR 143bn liquidity per quarter, but will ease the pressure on the currency parity also; calculated on the annual Capacity Charge due to IPPs at PKR 570bn.

9.       Pakistan is one of the top countries with highest annual charity i.e. about PKR 240bn charity in normal circumstances. These unprecedented times with the advent of Ramadan (Zakat/Fitra) make it just timely to raise more than the normal to support the Gov’t Relief Fund, to the fullest possible.

Important: All the transfers, benefits, utility/tax/interest rate cuts to businesses should be contingent upon no layoffs/salary cuts. Import Substitution is the priority for the domestic businesses to reduce reliance on imports!

The above actions will only provide time to fight and build new shields, systems, procedures, and training to people for preparing them for the next round of these challenging times.

Additional Key Actions to Support Macros, Overall Economic Activity and Growth

• Ask Saudis to completely forgo, at best, or, at least defer the ‘payments’, or enhance the Oil Facility to 5 years.
• Take benefit of low/negative rates; raise long-term global Bond; Malaysia US$4.3bn (50yr); Qatar US$10bn (30yr).
• Supply-side addressed, now Demand side of Construction activity should be generated thru availability of cheap mortgage/housing loans, tax cuts/reduction on Cement/Steel (substantial costs to any construction activity).
• Amnesty, if given to Construction, should be given to all industries setting up projects, esp. to help build country’s manufacturing capacity to cash-in timely on the fast-emerging opportunity (world beyond China) detailed ahead.
• All front-line retail industries be allowed (with due care) to remain open and working for ecosystem to stay alive. 
• GST deposits to FBR and provincial tax authorities be done upon collection from the customers.
• No WHT deduction for Mar-Jun 2020; Deferral of Income Tax on Businesses for Apr-Jun 2020.
• Move fast on Ease of Doing Business/Cost of Doing Business with emphasis on export-driven investments and import-substitution as key priority.

Strategy – ‘Allocation’ versus ‘Delivery’

Financial allocation of a relief package is very important, but timely Delivery, or provision of the same, is absolutely key to addressing the woes of the Poor, before the damage starts taking place and gets bigger, thereby rendering all the efforts ineffective. 

As they say, “Data is the New Gold”, the relief can be delivered in time through smart use of the technology and the data at hand. In this regard, i) fast aggregation of the Government’s various databases i.e. NADRA, FBR, EOBI, BISP, and, ii) matching them with the mobile subscriber base (over 160mn people with mobile SIMs), along with on-boarding of the large NGOs/charities (who know who-and-how to reach out, can help authorities reach to the most, and share more judiciously.

The combination of the two could play a vital role for fast and effective distribution of the relief package, especially through usage of the mobile wallets/digital mode of cash disbursements. NADRA database, in combination with the mobile subscribers’ data can also be used to extract those at the bottom of the pyramid, by screening all on the basis of those possessing basics versus luxuries, thereby identifying those most vulnerable to lock-downs. These are only a few ideas how some smart moves can work wonders. But we need to act fast!  

Opportunity – Only for the Brave!

Strategically, we have to look at the Pandemic as a life-time opportunity to reinvigorate the social contract between the government and the public, and correct everything for good for the country, which should eventually put the entire country on a sustainable path. It is a huge opportunity to ‘Document’ the entire economy; we have to make digital economy a norm and a practice than only an exception; more spending in health, education (human resource), and R&D should be on priority across the board; more dynamic and resilient governance model needs to be built to tackle such new normal more timely and effectively.

Talk of competitiveness, Pakistan is currently ranked 8th on the Top-10 emerging destinations having cheapest manufacturing hub. Time to climb that ladder up fast, given the world is now to move from only-China to beyond-China for investment, growth and output. It is an unprecedented Godsend offer that we cannot afford to miss. More so, because 6 of the Top-10 global manufacturing powerhouses (contributing over 64% to global output) have also been amongst the top ones being hit by the Pandemic i.e. China, South Korea, Italy, Japan, Germany, and the US (total value produced, as of 2018, stood at ~US$ 11tr). So the next in line stands to benefit the most. 

Now in Pakistan’s context, if we are able to only fetch 0.5% share of the output of these powerhouses (by replacing only fraction of these virus-hit destinations), it would take Pakistan’s total industrial output by an additional US$ 55bn, totaling US$ 112bn, taking domestic manufacturing share in the GDP to 33% only in next few years, from below 20% in 2019, driving most of Pakistan's GDP through manufacturing alone, with country-wide economic benefits. For that to happen, we need to fast reset ourselves, completely, to create an ecosystem that suits the new normal. Overall, it is an opportunity to make Pakistan a true prosperous nation in the world.      

Finally, Covid-19 Pandemic is an ‘Opportunity’ for the Brave, and a ‘Threat’ for the Coward. So, as a nation, the choice is ours, whether we want to enter a whole new paradigm with a winning attitude – a shift from one world to another, for eternal prosperity. OR, we respond as usual, and enter a ‘Black Hole’ that takes us nowhere but in the dark for good. It’s a shared pain amongst the government, businesses and the public at large, therefore a common fight, hence can only be won, collectively.

So, time to ‘Go Big-Act Fast’!   

^Assumptions for Calculating Cash flow impacts are mostly for 3-6 Months; Oil is Arab Light Crude; CRR (Cash Reserve Requirement); CPP=Capacity Purchase Price; Currency Parity=PKR 165/US$; 3M/6M=3-Month/6-Month; CAD=Current Account Deficit; PSE=Public Sector Entity; IPP=(Independent Power Producer).

Disclaimer: This article was prepared or accomplished by the author in his personal capacity. The views and opinions expressed in this article are the author’s own, and do not reflect the view of his company(s). The intent of this article is to only present one of the many possible scenarios to show how the potential economic and financial impacts of the Covid-19 Pandemic on Pakistan economy and its people at large can be mitigated through timely actions of the authorities with some key economic policy actions, along with some estimates of the likely cash flows given in an attempt to provide an outlook to the policy decision makers. The facts presented, and all the calculated figures, in the article were taken/based on from sources deemed reliable. However, the author does not guarantee the accuracy, reliability, and completeness of the information provided. The reproduction of this article, in any capacity, shape or form, is strictly prohibited, unless done with the written consent of the author.