Karachi, June 10, 2020: The latest update is that the coronavirus is spreading quite rapidly in Pakistan. An important global trend has been easing lockdowns rather than the previous flattening-the-curve theme. Yes, the country cannot afford a complete lockdown, but without strict controls, it could prove to be a twin disaster as both healthcare and the economy could severely suffer.
The 7.5 percent-12 percent estimated GDP contraction in 4Q provides an idea of severity of COVID-19’s impact. The base case should be flattish or slightly negative in FY21 at this moment. A worst-case scenario could entail a >2.5-3.0 percent contraction. Fiscal policy has to assume the senior role and in that case debt levels will inevitably increase. This becomes important, especially when little room remains on the monetary policy front (max. 100bps cut from here). On the external account, it is crucial that net inflows sustain to maintain rupee stability and by the looks of it, this could indeed be the case.
In the FY21 Federal Budget, key focus should be on growth, jobs and income equality. For this, higher liquidity for emergency needs, investments and savings need to be prioritized.
While real life cases rise, it seems the stock market has recovered after initially testing positive. Now either the market is fixating on a happy ending or is assuming we have moved beyond peak uncertainty. Yet we argue that the market is not ahead of itself as valuations remain cheap. However, one should keep COVID-19 in mind because if the situation worsens, we might witness a sharp correction.
