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Econominc Effects Caused by Covid-19 around the world specifically in Pakistan

By Muhammad Atif Khan

The COVID-19 epidemic has spread at an alarming rate, infecting millions and drawing economic activities to close as countries imposed curfews and lock downs to halt the spread of the virus. As the health and human toll grows, the economic crisis is already evident and represents the largest economic blow the world has ever experienced after World War 2.

Major Economies Effected By Covid-19

According to World Bank, All major economies have experienced COVID-19 outbreaks, of varying intensity. Output in advanced economies is set to decline sharply in 2020, as domestic requirement and supply, trade, and investment have all been severely disrupted. Considering that the pandemic does not lead to lasting damage to financial systems, growth is expected to rebound in 2021, supported by unprecedented support from fiscal, monetary, and financial sector policies. In China, the output appears to be recovering from the large drop at the start of the year, but the strength of the expected rebound is uncertain. Advanced economies have faced a very substantial fall inactivity as they grapple with the far-reaching outcomes of the pandemic. As a the result, the advanced-economy output is now projected to slow dramatically, from an expansion of 1.6 % in 2019 to a contraction of 7 % in steps toward gradually relaxing restrictions in some countries, activity remains very weak.

In USA the domestic COVID-19 outbreak and associated large-scale pandemic-control steps have massively disturbed other activities. High-frequency service sector intimates the point to an unprecedented collapse, particularly for services and travel. Associated to the global financial crisis, weekly unemployment claims have risen much quicker, while industrial production and local sales have fallen much more sharply. Meanwhile, the collapse in oil prices has depressed investment in the highly leveraged U.S. shale oil sector. The Federal Reserve has cut rates to near-zero and declared far-reaching measures to sustain the financial system. The latter includes unlimited purchases of U.S. government debt and mortgage-backed debts, as well as large-scale purchases of corporate bonds and of securities issued by lower levels of government. The U.S. government has also provided financial support approaching $3 trillion, including over $1 trillion in loans to firms and to state and local governments. Further measures, such as another round of direct transfers to households, are under consideration. U.S. GDP is expected to contract by 6.1 % in 2020—7.9 percentage points below previous forecasts, reflecting the severe consequences of the pandemic in the first half of the year, and an assumed gradual recovery in the second half. It is subsequently projected to rebound to 4 % in 2021, as large-scale policy support gains traction, amid an assumed recovery in consumer and investor confidence.

In Japan, precautionary measures were able to slow the spread of the virus but triggered a decline in economic activity, magnifying acute adverse spill overs via trade and financial channels. The postponement of the Tokyo 2020 summer Olympics has compounded the adverse economic effects of the pandemic. To help support growth, the Bank of Japan has ramped up its securities and corporate bond purchases, expanding the size of its balance sheet by over 10 percent of GDP since January. The government has also announced financial support packages cumulatively worth about 40 percent of GDP—in addition to repurposing funds from the December 2019 stimulus—to cushion the outbreak’s domestic impact. Output is projected to shrink by 6.1 percent in 2020, 6.8 percentage points below previous expectations. Weaker-than-expected outcomes earlier in the year, as well as the severe effects of the pandemic, contribute to the downgrading. Growth is expected to recover to 2.5 percent in 2021, aided by fiscal and monetary support.

Widespread virus outbreaks throughout Europe have prompted governments to impose various preventive measures such as nationwide lockdowns, extended school closures, and border restrictions. These have significantly disrupted domestic economic activity. Many European members are heavily reliant on tourism, a sector virtually shut down by government policies, and particularly prone to slow recoveries. In contrast to the United States, the rise in unemployment has been modest so far, in large part due to the widespread use of short-time work policies. In response, the European Central Bank has offered low-interest loans to banks, significantly boosted asset purchases, and allayed fears of member-country defaults by lifting distributional restrictions on its bond-buying program. Member governments have rolled out significant fiscal support packages. For example, Germany provided stimulus worth 4.5 percent of GDP— about twice the support it provided in 2009—in addition to an envelope of over 20 percent of GDP in loan guarantees for the corporate sector. Italy, although constrained by existing elevated debt levels, announced fiscal stimulus above 4 percent of GDP. Large member countries are also advancing a major recovery plan for the European Union, including grants for economies hardest hit by the crisis. European output is expected to contract by 9.1 percent in 2020—10.1 percentage points below previous projections—with all major member countries experiencing recessions before a gradual recovery gets underway late in the year. Growth is forecast to rebound to 4.5 percent in 2021, reflecting fading pandemic-related drag, and the eventual effects of accommodative fiscal and monetary policy.

Economic Effects of Covid-19 in South Asia

Although the South Asia (SAR) region has thus far witnessed a smaller number of reported COVID19 cases than most other regions, previously supportive factors, such as solid tourism activity, have largely faded, and domestic pandemic mitigation measures are weighing heavily on short-term economic activity. Sharply deteriorating economic conditions in advanced economies and major emerging market and developing economies (EMDEs) have severely impacted export and other industries in SAR, while nationwide lockdowns have curtailed consumption. The pandemic reached SAR later than some other regions, but the incidence of cases has been rising rapidly. Industrial and services activity has plummeted in the region after global demand collapsed. This is reflected in sharp decelerations in the purchasing managers’ indexes and new export orders in India, the largest regional economy. Trade activity has sharply fallen across the region. Sales and production in several key sectors in regional economies (e.g., autos in Pakistan, the garment in Bangladesh) have been hit especially hard amid anaemic demand. Business confidence in both manufacturing and services sectors have concomitantly fallen in economies like Pakistan. Key trading corridors in the region also witnessed disruptions. Private consumption has been severely hindered as large-scale lockdowns were instituted in several economies, including Bangladesh, India, Nepal, and Pakistan. Some recent relaxations to these measures have been cautious, given a continued rise in COVID-19 cases. Non-essential business closures stalled retail sales. In rural areas, food and other essential activity deliveries also faced major impediments. Closure of small and medium-sized enterprises, a key engine of regional private sector activity, induced substantial loss in employment and private investment. Tourism activity was on a path to recovery but became severely damaged by the pandemic. This includes sharp declines in tourist arrivals in economies like Bhutan, Nepal, Sri Lanka and especially the Maldives, where tourism, directly and indirectly, accounts for more than two-thirds of GDP. This includes a decline in arrivals from China, a key market, since early in the year. International travel bans and other restrictions adopted by regional economies (e.g., airport closure for arrivals in Sri Lanka) have further contributed to the weakness in tourism. In response to the pandemic, fiscal and other stimulus actions have been announced in virtually all major regional economies. These stimulus packages have included health spending increases, direct transfers, social assistance, employment protection, and support for migrants and rural area workers, credit support for small and medium-sized enterprises, and food security measures. Financial markets in SAR have been rattled earlier in the year by the global market turmoil associated with the pandemic. Equity indexes tumbled and capital flows in large economies have reversed amid high investor risk aversion, with some stabilization recently. Due to the balance of payment pressures, the exchange rates of large economies have also deteriorated somewhat. High financial market uncertainty has contributed to delays in capital spending in large corporate conglomerates. Upward pressure on inflation late last year is now offset by the effects of lower oil prices and markedly more subdued activity. As a result, inflation is beginning to ease in the region. Central banks in virtually all SAR countries have taken measures to stimulate economic activity as the impacts of COVID-19 become increasingly pronounced, lowering policy interest rates and providing additional liquidity to the financial system in an attempt to support already-weak private sector credit growth. In India, growth is estimated to have slowed to 4.2 per cent in FY 2019/20 (the year ending in March 2020) and output is projected to contract by 3.2 percent in FY2020/21 when the impact of COVID-19 will largely materialize. Stringent measures to restrict the spread of the virus, which heavily curtail activity, will contribute to the contraction. Spillovers from contracting global growth and balance sheet stress in the financial sector will also adversely impact activity, despite some support from fiscal stimulus and continued monetary policy easing (Figure 2.5.2.C). Pakistan and Afghanistan are both projected to experience contractions in 2020. Mitigation measures imposed in these countries are expected to weigh heavily on private consumption, contributing to output contractions of -2.6 percent (FY2019/20) and -5.5 per cent, respectively. Key labour-intensive export sectors like textiles are expected to contract sharply and subsequently recover slowly. Bangladesh and Nepal are projected to experience substantial decelerations in FY2019/20. In Bangladesh, growth is expected to slow to 1.6 percent, as the recovery in industrial production is reversed by COVID-19-related disruptions such as mitigation measures and global exports plunge, and as remittances fall. In Nepal, growth is projected to decline to 1.8 percent due to largely the same factors, in addition to a drop in tourism (more than one-third of which are from China and India). Both economies are also vulnerable to supply chain disruptions, both domestic and those stemming from imports of intermediate goods, as well as travel-related disruptions to international contractors in sectors like construction. A sharp decline in tourism is also expected to weigh on activity in Bhutan and Sri Lanka, and even more so in the Maldives. In Sri Lanka, the combination of falling tourism, manufacturing activity and services associated with the pandemic is envisaged to cause output to contract by 3.2 percent, despite the earlier recovery from the April 2019 terrorist attacks. The Maldives is expected to experience a deep contraction in 2020, of 13 percent, owing to their heavy reliance on tourism, especially from China and Western Europe.

The sharp decline in oil prices in 2020 could provide some support to the region, given sizable oil imports in India and Pakistan, and help cushion fiscal and current account balances. This positive effect may be offset by falling remittance inflows from oil-exporting economies, however, as economies that host migrants from SAR struggle with the twin challenges of the pandemic and the oil price collapse. These flows are expected to decline by about one-fifth in the SAR region this year (World Bank 2020l). Growth in 2021 is projected to recover to 2.8 percent as pandemic mitigation measures are rolled back and services and manufacturing activity resume. An expected tapering of global headwinds is expected to further support recovery of activity in the region. Lingering legacies from the pandemic, such as slow revival of confidence and tourism activity, will still weigh on the pace of this recovery, however.

Economic Effects of Covid-19 in Pakistan

COVID-19 rates risk overwhelming Pakistan’s health system, slashing growth, crashing the recovery, and pushing the country’s most exposed further into poverty, a new UN impact assessment, coordinated by UNDP, finds.

Pakistan’s confirmed and reported COVID-19 cases, as of 11 July, topped 285,000. More than 6000 people have died. Pakistan is the fifth most populous country in the world, with dense cities where the virus spreads far faster. This virus, alongside preventive measures to mitigate it, poses major risks to lives and livelihoods with impacts that could last for decades, the study says.

While the poverty rate declined by 40 percent over the last two decades to 24.3 percent in 2015, the IMF projects a sharp reversal, with up to 40 percent of Pakistanis living below the poverty line in COVID-19’s viral wake.

Real GDP growth is expected to slow by 3 percent, with downturns in services and manufacturing. Agriculture will also lag if lockdowns continue and disrupt needed transportation, logistical support, labour, and access to inputs for the next planting season.

This assessment, which will inform policies and programs to help the country recover, argues for a “deliberate effort to reach out to the furthest and most vulnerable through economic relief packages and social sector services.” But implementers and planners will face challenges in finding innovative technologies and credible partners to provide support efficiently and transparently, it says.

Writer of this feature story is the student of institute of Communication studies , University of Punjab

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