Najma Minhas, GVS Editor, speaks with Mr. Yawar Harekar to discuss the financial position of the country, in terms of growth and its impact on multiple sectors. He is the Head of Sustainable Finance at JS Bank with over fourteen years of experience in emerging markets. JS Bank is one of Pakistan’s fastest growing banks. Recently, they set up a Rs. 110 million COVID-19 fund to study the impact of the virus in Pakistan. Mr. Yawar Harekar discusses what direction banks are going in during the coronavirus lockdown – specially amidst the plummeting economy, rising unemployment and the negative estimates of growth predicted by the IMF and World Bank.
Najma: Recently, the World Bank and the IMF came out with negative estimates of growth for Pakistan this year, that is, since the Coronavirus impact. According to them, we will have -1.3% to -1.5%. Do you agree with these numbers? What do you foresee yourself?
Yawar: Yes, you are absolutely correct. Both the international organizations have predicted negative estimates of growth for Pakistan. But the keyword here is ‘predicted’; that is, the World Bank and the IMF have forecast that if the COVID-19 pandemic lasts longer than expected, Pakistan could see a negative growth rate of 1.3% to 1.5%. Now, as with any numbers we must look at many variables; so, there are many scenarios that we must see.
Firstly, if the lockdown persists and since it’s a global lockdown, the global economy will shrink by 3%. Now this is the worst-case scenario and it sees the lockdown continuing; the number of COVID-19 infected patients increasing and a vaccine not coming out for the next year or 18 months. That being said, this will also cause a shrinkage in the manufacture and services sector. And along with that, our exports will also be severely affected. So, the question is, what do I foresee?
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I foresee that this lockdown might not last that long. I might be very optimistic here, but I believe that as human beings, we are very resilient and innovative. More importantly, there are about 70 vaccines currently under development for COVID-19. That said, a lot of countries are taking steps to jumpstart their economies once this pandemic is controlled to a certain extent and the lockdown eases. And not just individual countries, but also multi-laterals like IMF, World Bank and Asian Development Bank, are stepping in to use their funds to help vulnerable economies.
Najma: In Pakistan, for example, the IMF is giving us 1.3 billion exactly for this reason – to help with the COVID-19 impact. Do you see that helping the predicted negative estimates of growth? And if you don’t agree with those estimated rates, what numbers do you predict for Pakistan?
Yawar: I believe that the growth will be minimal. So, COVID-19 will impact Pakistan severely – there is no doubt about that. And the finance ministry has predicted that for the first time we will have a negative growth rate. So, the economy will contract and the negative estimates of growth will see the light of day. But I think that the impact has been overstated by the policymakers, just to ensure personal credit as soon as the economy gets better.
Najma: So, in terms of sectors, do you see it affecting the industry more or the agriculture? We know that agriculture was already affected this year by the massive locust infestation. But, where do you see the biggest impact of COVID-19?
Yawar: So, both sectors will be affected definitely; but, in different ways. The industrial sector will be affected because of the lockdown. This means that manufacturing will go down; export industries will be impacted with a halt in export orders; a lot of businesses will have adjusting time manufacturing, like IT manufacturing, and they will be affected by the liquidity crunch which is very severe. Some of them will go bankrupt, and to prevent bankruptcy, some will lay off workers. So, industry will be affected. A few industries – like those that make PPEs and the ones geared towards solving the pandemic – might do well. But their impact is not significant.
Now, the agricultural sector will be affected in a different way. There could be logistical impact which can lead to disruptions in the food supply chain. Thank God, right now the food supply chain is very adequate. Also, the free movement of people will make it harder to harvest crops. But again, as per the FAO (Food and Agricultural Organization), the international prices of commodities have actually declined. Nevertheless, Pakistan’s agricultural sector plays a central role in the economy. It contributes about 20% to the GDP and absorbs more than 45% of the labor force. So yes, it will be impacted.
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Najma: So, what about the impact on the business conditions in general in Pakistan. Do you think that the businessmen will start worrying about its impact on their profitability? How do you see it affecting banks for example?
Yawar: Yes of course, businessmen will worry for the same reasons mentioned earlier. Industries will be impacted and quite severely. The businessmen are worried about that, about not having enough liquidity, about laying off workers and about how they will bounce back once the economy gets better.
Najma: Do you think that the State Bank of Pakistan has done enough for the businesses? Its reduced interest rates by over 4% and quite aggressively has brought them down to 9%. Do you think that’s enough for the economy to start moving again? Is it enough for businesses to become more optimistic about their costs? Or do you think that they should do more?
Yawar: I think that the State Bank has taken very rapid and drastic steps. They’ve cut down the interest rates from 13% to 9% – 4% is a huge cut. But the business community expected even more cuts. They say that the regional average of interest rates is around 5-6% and the State Bank should bring down the interest rates accordingly. As you know, interest rates and loans are inversely related. So, the lower the interest rates, the more loans people will take out to support their businesses.
Now, its up to the SBP as to how many more rate cuts they will perform but, I believe that more cuts are coming. Then again, one also has to consider the lag effect which dictates that lower interest rates affect the businesses a few months down the line. So, yes, the SBP is playing a very large and productive role to ensure that the economy impacts are restricted.
Najma: One interesting thing that I saw happening during this Coronavirus impact is that initially the Rupee was devaluing. It devalued up to around 167 and then we suddenly saw a sharp appreciation. Globally, most of the emerging markets saw devaluation against the Dollar. For example, the Indian rupee has devalued around 7% and the Mexican Peso around 23%. So, can you explain why we saw an appreciation?
Yawar: The Pakistani Rupee is not pegged to the US Dollar so it sees a lot of fluctuation. Hence, appreciating and depreciating is expected. I feel that its due to two conditions; firstly, the economic conditions and secondly, there is a lot of speculation on the market. So, when the currency traders expect the Dollar demands to increase, the Dollar goes up and the same pattern follows with the Rupee. So, broadly, the US Dollar has been trading lower than its major peers, that is, the Pound, the Euro and the Yen, throughout this month. The Pakistani Rupee depreciated at first because the World bank predicted a recession in Pakistan, due to the pandemic. However, the Pakistani Rupee surged later because of stronger numbers. The FDI numbers were stronger and the demand for Dollar decreased because of a lack luster import demand.
Najma: I agree – the restriction of imports and exports have brought forward this depreciation. So, we discussed the negative numbers earlier. All over the world, there is a discussion going on that if we will see a U-shaped recovery or a V-shaped recovery. Could you explain what they mean and where do you see Pakistan falling into this?
Yawar: A V-shaped recovery is when there is a steep decline in the economy followed by a steep upturn in the economy. So, it’s like a V. Whereas, a U-shaped recovery sees a fall, then a plateau that stays there for a bit, followed by a slow climb back up. I just read in a recent survey among economists and a lot of them say that the global recovery will be U-shaped. And there is no reason for us to think that the Pakistan’s economic recovery will not be the same. It has been seven decades since the Pakistani economy last contracted; since 1951, this is the first time that our economy is expected to contract. But we expect 2021 to be better for the global economy and Pakistan will rebound Insha Allah.
Najma: Right now, a lot of export orders have gone to a standstill. Do you see those coming back in the next couple of months?
Yawar: Definitely. As the global economy rebounds, export orders will go up. There will be a lot more demand. Industries will regroup and restart. So, yes, I do expect that to happen. And this will also help reverse the negative estimates of growth fast.
Najma: JS Bank is obviously very active and is known to be a big SME bank. How are you guys helping your clients during this very difficult period? Can you share a story or two?
Yawar: JS Bank, thanks to SBP, has brought forward a few schemes. For example, one of the major schemes is for refinancing for payment of salaries. It helps you pay your employees on the payroll with the help of a discounted loan; this discount can be anywhere from 3% to 5% for tax-paying companies. There is also deferment of the principal amount. Here, you don’t have to pay the principal but only the interest on your own payments. Then there also some cosmetic steps that are very important, such as, putting in fresh currency notes in the ATMs. It is important to remember that COVID-19 can spread through cash as well so, the State Bank has helped us do that. We are also promoting digital banking without bank charges. This can be utilized through our app on your phone or on our website.