File photo: Haroon Sharif, former Minister of State and Chairman of Board of Investment 

 

ISLAMABAD, June 9 (China Economic Net) – The rapid spread of Covid-19 pandemic has been the major shock to the path of stabilization and growth for Pakistan. It is now certain that Pakistani government will have to deal with multiple challenges including the highest ever budget deficit, joblessness due to negative GDP growth, declining exports and a possible civil unrest during the next financial year.   

 

Given its third year in power, Imran Khan will try to focus on populist interventions like cash transfers to the poor and targeted subsidies to businesses in a rapidly shrinking fiscal space. 

 

In addition, Pakistan will have to strike a deal on revised targets under the ongoing Extended Fund Facility (EFF) from the IMF.  This is an extraordinary situation for the nation that requires out of the box solutions and a clear policy focus on headline issues rather than attempting to address wide ranging political and economic pressures.  

 

It is also a challenging time for maintaining the pace and focus of China-Pakistan Economic Corridor (CPEC) initiative which in its current shape faces an imminent slow-down in the near future. 

 

CPEC partnership will be tested on geopolitical pressures, fiscal constraints in both China and Pakistan, macro-economic stability and more importantly ensuring sustained ownership by the people of Pakistan. If both countries manage to set a few strategic priorities that ensure human development, job creation and easing government’s debt burden, CPEC will certainly come out as a winner. This article evaluates the evolving situation and suggests priorities to mitigate the potential risks on the CPEC progress.  

 

As expected, the pressure on Pakistan is increasing in the wake of escalating tensions between the US and China. Recently, the outgoing US diplomat Alice Wells urged Pakistan to go for a moratorium on Chinese debt in line with Prime Minister Khan’s desire for a debt relief to expand fiscal space for social protection and stabilization of economy. 

 

Debt restructuring is a complex issue and it will be increasingly difficult for Pakistan to negotiate favorable deals with the Paris Club and other western lenders only. 

 

Pressures are likely to come from Western countries to restructure the overall debt portfolio as Pakistan goes for the next IMF review this year.  

 

While behind the scene diplomatic efforts have started to strike a balance but Pakistan is not left with many options but to renegotiate terms of bi-lateral debt with China. 

 

It is pertinent to note that most of Pakistan’s deb consists of short-term loans with a debt to GDP ratio already touching 98 percent and expected to rise further. 

 

With a significant decline in tax revenue, the government will have to bank on more domestic resources to finance its development priorities.   

 

With a nosediving economy, Pakistan will be experiencing huge job losses in both urban and rural areas. Some estimates suggest that up to twenty million people are vulnerable to temporary unemployment as a result of Covid-19. 

 

Currently, over 40 percent of Pakistan’s workforce is employed by the non-agriculture services sector where vulnerability to economic shocks is very high.  

 

In addition, a large number of Pakistani work force is returning home from the Gulf countries due to an economic slowdown in oil producing countries. 

 

It will be great if CPEC could quickly structure a few public works initiatives that could immediately absorb some of the unemployed labor force in both the urban and peri-urban areas. 

 

It will take a much longer time for the private sector led rebound and immediate solutions will require a state intervention to create jobs. 

 

The key factor in this proposition is that the pressure on Pakistan’s fiscal situation must be minimized through long term soft financing instruments.  

 

Such an undertaking will not only enhance CPEC goodwill among masses but will also help Pakistan mitigate external political pressures. 

 

The current structure of CPEC has too many small interventions in agriculture, social and industrial sectors. China must take cognizance of the fact that institutional capacity of the state has further eroded due to the high transaction cost of Covid-19 response.    

 

According to the World Health Organization, Pakistan is ranked 66th amongst high-burden-of-disease countries. Despite its heavy burden of communicable as well as non-communicable diseases, Pakistan’s expenditure on public health is only 0.91 percent of its Gross Domestic Product. 

 

The country has one doctor for 957 people and one hospital bed for 1,580. The government run hospitals can only cater to 30 percent of population and the private healthcare facilities cover the rest. 

 

This offers a strategic opportunity for CPEC to invest in the health sector with a combination of subsidized as well as commercial investments to increase quality and access to health services. 

 

The best option would be to get in to joint ventures with established private groups for expansion of existing capacities.   

 

A healthy population is critical for the long-term goals of CPEC and will yield both commercial as well as social impact returns. There have been some movement in this direction with a few recent technical collaborations in the pharmaceutical industry but there is a huge gap in demand and supply of health sector services in Pakistan. 

 

It is a good time for China to look for human development partnerships with multi-lateral development organizations operating in Pakistan. 

 

Looking at the structure of Pakistan’s economy, Small and Medium Enterprise (SMEs) play a vital role in country’s development. These firms contribute around 40 percent to GDP, 40 percent to exports, 80 percent to non-agricultural employment, and 35 percent in total value addition. 

 

A recent assessment by Sustainable Development Policy Institute suggests that 1.14 to 1.42 million SMEs out of 3.8 million may face 50 percent decline in their income. 

 

Based on their cashflow vulnerability, around 0.8 million SMEs may not be able to survive – thus risking up to 9.5 million jobs.  

 

While the government is focused on supporting the poor people through cash transfers and by making availability of credit to large firms, the real risk of economic decline is in the informal SME sector. 

 

There is an urgent need of setting up an SME Fund to provide financial, managerial and market access related support to the SME sector. A CPEC Fund for SME development will not only sustain this sector but will also go a long way in supporting the revival of sustainable growth in Pakistan. 

 

Haroon Sharif, the writer is a senior economic policy thought leader and served as Minister of State and Chairman of the Board of Investment in Pakistan.