“Today, you all will shake each other’s hands before leaving the mosque. Perform namaz [prayers] standing shoulder-to-shoulder and ankle-to-ankle in the rows! If anyone amongst you contracts [the] coronavirus, shoot me in the middle of the street and you will not be punished for that!” These words are not mine but were said by a maulvi (Islamic cleric) in a mosque in Pakistan, the video of which I watched online a few days back.

The World Health Organization has advised practicing social distancing so as to reduce the spread of the coronavirus that causes Covid-19, but in a country like Pakistan, where there are millions of clerics promoting social gatherings and spreading misinformation (like that mentioned above), the WHO’s advice is considered a yahoodi saazish (Zionist conspiracy) by many of its poorly educated and illiterate citizens.

The Covid-19 curve in Pakistan is steepening with every passing day. The country is under a partial lockdown. Businesses are operating at less than half of their normal capacities because of the shortage of raw materials, shortage of labor or restrictions on the movement of the citizens imposed by the provincial governments, which is taking a toll on aggregate demand and supply.

Pakistan’s COVID19 Case By Date Curve (As of March 24, 2020)

Liquidity crunch

There has been no good sentiment in the air on the trading floor of the Pakistan Stock Exchange since the beginning of March. And it all fell down like a house of cards on March 9 when the Kingdom of Saudi Arabia announced it was waging a price war against Russia to capture a greater share of the oil market as demand has been sliding, with China, Europe and the rest of the world hit hard by the spread of Covid-19.

On March 9, the KSE100 went down 2,106 points just moments after trading started and the circuit breaker had to be triggered to halt trading. But nothing can provide comfort to an investor in the middle of a looming recession. This Tuesday, the index plunged by almost 7%. A sell-off will leave companies short of liquidity. Insufficient cash flow as a result of slowing demand up and down the country and with the central bank’s policy rate at 11% will make it hard for businesses to breathe normally.

KSE 100 as of March 24, 2020. Chart: PSX Data Portal

Almost 60% of Pakistan’s exports are textiles. The problem this sector is currently facing is that the majority of the raw materials – dyes and chemicals – that are required to produce textiles are imported from China. The industry contributes highly to the foreign-currency reserves of this dollar-strapped country that finds itself quite frequently with just enough reserves to pay for one and a half to two months of imports.

The textile industry has already been suffering from liquidity shortages as the highly incompetent government of Prime Minister Imran Khan, after ending the zero-rate status of the important export-based industries, failed to refund the sales-tax proceeds and custom-duty rebates of these firms.

The last quarter of the ongoing fiscal year and the first two quarters of the upcoming fiscal year FY21 will bring unprecedented levels of cash-shortage problems as investors have started moving into safe-haven stocks, gold and dollars.

The dollar is the predominant haven at this point in time and the Pakistani rupee like any other emerging-market currency is losing its value. That’s not going to help exports, as the flow of raw materials plus the cash crunch and outflow of capital at an unprecedented pace present many challenges to unprepared exporters and the government of Pakistan.

Logistics

Furthermore, there is quite a chance of Europe’s and North America’s ports getting overwhelmed with incoming cargo from China in the next few weeks. I don’t believe a word of President Xi Jinping, and that includes what his administration is reporting about how Beijing has defeated the virus that first emerged in China. But just for the sake of making a point about the situation of global logistics, if China has actually stopped the spread of Covid-19, while Europe and North America have failed to flatten the curve, the situation will get more difficult for Pakistani exporters.

But I strongly believe that the situation is no more under control in China as it is in Europe and North America. A shortage of truck drivers and crane operators will reduce operations at the ports. The virus is spreading, and workers are either sick or have been self-quarantined. A buildup of cargo at the ports of China, Europe and North America will continue slowing the global supply chains. Pakistani exporters will face delays in receiving imports and sending exports to their destinations. Demand shortages will make things even worse.

Unemployment

One of the major “deficit powerhouses” in Pakistan is its national flag carrier Pakistan International Airlines (PIA), which has been running a net operating loss for decades and now will end up furloughing workers if the situation persists for the next two to three months.

The airline will keep running a loss of about $63 million a month if its operation remains suspended for the next 25-35 days. The loss of demand is hammering the global aviation sector, with many small private airlines on the verge of bankruptcy.

I believe that by the end of May – if we won’t observe the pandemic fading away – the unemployment rate in Pakistan could surge by 4-5 percentage points. A rough estimate based on Pakistan Bureau of Statistics data suggests that approximately 4.2 million salaried-class workers could end up jobless by the end of this period.

Shortage of foreign-exchange reserves on the shoulders of plunging demand and global supply-chain contagion could send Pakistan’s economy to the morgue.

Stimulus

What the State Bank of Pakistan did this month was an explicit intervention in the matters of fiscal policy. When a country’s central bank crosses the line – even for the sake of protecting its economy – without first taking the permission of parliament, it loses the trust of the members of the public.

The SBP announced a lending package for hospitals to purchase equipment and other necessary items to face the Covid-19 outbreak; it also announced a package for investors who want to build new plants in the country. It was something that the hospitals and investors were expecting from the government, but sooner or later this intervention will be questioned internationally. Other countries’ central banks control monetary policy, not fiscal policy. And only a credible central bank can implement its monetary policy effectively.

A strong fiscal and monetary stimulus is the need of the hour. A 225-basis-point reduction in the policy rate at a time when at least a 400-500-point reduction is necessary to induce consumption and investment demand was equivalent to turning a blind eye to a failing economy during a recession.

It is high time for the Khan administration to opt for a $12 billion to $15 billion fiscal stimulus and inject it at once to reduce the intensity of the crisis somewhat. If the pandemic persists, an even bigger relief package will have to be introduced to cope with the plunging demand and supply.