Special Assistant to Prime Minister Imran Khan on Health Dr Zafar Mirza during a press conference on Feb 01, 2020 assured that a comprehensive plan is in place to cater an eventuality of spread of Corona virus in Pakistan. On similar lines, the economic managers in Pakistan also need to immediately chalk out an emergency economic plan post Corona Virus CPEC – China Pakistan Economic Corridor. Barron’s reported that during SARS (Severe Acute Respiratory Syndrome) epidemic in 2003, Chinese stocks tumbled 7% in the week after Beijing announced the outbreak, and China’s economy contracted by 2.4 percentage points in the third quarter of 2003, though the overall hit to gross domestic product that year was about one percentage point – just a few possibilities of post corona virus CPEC.
Year 2019 was the worst year for world economy in a decade. It is forecast that in the likely case of Corona crisis stretching out for another month, its cost could be a two-percentage point decline in Chinese growth to 4% or lower this year. First quarter growth figures in China could fall to 2% year-on-year – which would be the lowest in decades, and down from 6% in the last quarter of 2019. According to Forbes impact of Corona virus could be much larger on global economy as compared to SARS in 2003. Reason for this big impact is because of the fact that Chinese economy has grown from USD 1.6 trillion in 2003 to USD 13.6 trillion in 2018 and its global exports have increased from USD 438 billion to USD 2.5 trillion during same period.
Pakistan and CPEC Currently
Having read the economic forecasts given by credible media, there are reasons to predict boost in economic activity in Pakistan under post Corona virus CPEC scenario. Pakistan has performed well to come out of the pressure it was experiencing six months earlier due to rising current account deficit. Pak rupee is stable despite stable interest rate for last 4 months. Time has come where State Bank of Pakistan can decrease the policy rate without fearing the flight of “hot dollars” that landed in Pakistan during last six months.
Pakistani government needs to cash-in on economic opportunities that are visible on the horizon due to efforts made during last six months or so. USD-PKR parity improved in favour of PKR for last six month – Source www.xe.com
Why it is the right time to reduce interest rates in Pakistan? Simple! A major chunk of Pakistan’s imports are energy related. Energy prices are expected to decline further due to Corona virus impact despite Brent being at six month’s lowest value as evident from the graph below. Source Bloomberg
A decrease in interest rates would provide Pakistan’s economy to make the most out of the impending low energy price era expected to prevail throughout 2020. Additionally, it will also improve government’s image in general public which is facing difficulty due to domestic price increase of food items experienced as a consequence of increase of domestic interest rates.
Measures needed to Capitalize Post Corona Virus Scenario
1) Boost Domestic Economy – Decrease interests rates and pass on maximum benefit of low energy prices to people of Pakistan. Government of Pakistan earlier missed the low-oil-price era during 2013 to 2017 and did not provide suitable policy initiative to support post corona virus CPEC scenario, economy or increase trade.
2) Stop Worrying About Current Account Deficit – With energy prices expected to remain low, there will not be pressure on Pakistan’s current account at least for the year 2020. This implies that decrease in discount rate, which may trigger flight of hot money that landed in Pakistan during last six months, will not drastically impact Pakistan’s foreign exchange reserves.
3) Hot Money in Pakistan Cannot Find a Better Destination due to Global Recession – Additionally, Pakistan is second largest economy in South Asia with over 200 million population. China is expected to focus more on increasing the pace of post corona virus CPEC to offset its expected decrease in growth. This will continue to maintain Pakistan’s position as a better investment destination, specially due to political and economic crisis that has been building in India due to Kashmir dispute and legislative issues like anti-CAA (Citizen Ammendment Act) protests.
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