Economy during coronavirus

The coronavirus had dealt a massive blow to Pakistan’s economy just when it was starting to gather pace. The stock market has plummeted in recent weeks and the economy is on the brink of a recession, while there is no word whether the next trance of the IMF bailout package will be disbursed.

The government’s economic team has been unable to capitalize on the declining price of crude oil in global markets. We were expecting a massive reduction in local oil prices but no decision was taken as the country has to make debt repayments. The prime minister then hinted at the interest rate would decline as the inflation rate has reduced, raising optimism among the business community.

The State Bank of Pakistan announced the new monetary policy but investors were disappointed as only a minuscule decline of 75bps was made and the interest rate was reduced to 12.5 percent. This was much below the market expectation as investors were expecting a two percent decline. Although this was the first time in three years that the policy rate has declined, it was deemed insufficient to help the economy or spruce business activities.

In times of a global pandemic, many countries are taking drastic measures to offset the negative effects on coronavirus and have launched economic stimulus package. The US Fed has slashed the interest rate to near-zero percent to stablise the economy. Trump administration also announced a massive $700bn fund to help prevent a further economic downturn. Trump is even considering handing out relief payment worth S2000 per month to help people ease the financial pain of the coronavirus crisis.

The Bank of England has cut interest rates as low as 0.25 percent to shore up the economy. Similar moves are also expected by the Canadian, European, Japanese and Swiss central banks. The UK has invoked wartime measures and declared an emergency against the virus. Even developed countries are struggling with the economic consequences of the global pandemic.

The SBP stated that it is ready to take action and support financial markets but its measures are inadequate. Pakistan has also lost around $800 million in so-called ‘hot money’ due to sell-off in the country’s bond leading to further depreciation of the rupee. Inflation might rise again as trade and supply chains are disrupted and profiteers will exploit the situation to their benefit.

The economy was improving and the indicators were rising before the coronavirus outbreak. The central bank can intervene to tackle disorderly conditions. It might be a long time before the nation’s economy recovers and we are back on track to economic prosperity.