The COVID-19 pandemic is advancing at an unmatched speed and scale. Industries are not immune to it, they are dealing with the immediate impact of the pandemic as both their manufacturing and supply chain operations are being disrupted, and their customers’ own operations are facing similar challenges. This has created an exponential effect on the whole supplier network, hitting industrial companies with full force. The pandemic crisis is contributing more complexity to an already hugely challenging situation for manufacturing industries. If the pandemic stays on for some more time, it will have long lasting implications for the industrial sector and the national economy.
The crisis has pushed the global economy into a deep recession. IMF’s World Economic Outlook has decelerated its earlier global annual economic growth forecast for 2020 from 3.3% to -3.0% in 2020 due to coronavirus effect, i.e., a decline of global income by about a trillion dollar and even beyond if the crisis prolongs. United Nations Conference on Trade and Development (UNCTAD) has projected a 30-40% downward pressure on global FDI flows. These developments will make the ‘Great Lockdown’ the worst recession since the Great Depression of the 1930s, and far worse than the Global Financial Crisis. The ultimate effect would thus depend on: how far and fast the virus spreads and how effective policies will be in controlling the damage.
Pakistan realized GDP growth rate of 3.3% in 2019. IMF has forecasted it for -1.5% in 2020 and 2.0% in 2021. Contrary to IMF projections, the Government of Pakistan (GoP) has projected GDP growth rate of around 2% for the current fiscal year. In any case, the reduction in GDP will be substantial.
Earlier it was predicted that Pakistan will comfortably achieve its export target of $24-25 billion for the FY2020. Pakistani industry started claiming in January that it does not have the extra production capacity to take and meet additional export orders. But this euphoria turned out to be short-lived. China is back on its feet, with that Pakistani exporters have started losing export orders. In January 2020, Pakistan exported $2.08 billion that has come down to $1.91 billion in February. There are strong indications that exports have further gone down in March and April, 80% of which is comprised of manufactured and semi-manufactured goods. Although proportionately smaller in volume, intra-industry trade has sharply reduced due to standstill outsourcing activities. That is a big upset for vendor companies in the engineering sector.
Pakistan’s industries are hurt from China's slowdown through disruption of global supply chains. The textile sector, which accounts for 55% of total exports, is currently facing a fall in imports of the majority of the raw material – dyes and chemicals – that are required to produce textiles and are mostly imported from China.
With lockdown since March 24, small and medium enterprises (SMEs) are the most hurt. A survey completed on April 15, 2020 by SMEDA reports that 95% of enterprises experienced a reduction in their operations, 23% reported up to 100% loss in export orders, 92% reported disruption in supply chain, 48% enterprises laid-off their employees and 89% are facing financial issues.
In view of the above situation, small to large industries are demanding from the GoP to take immediate steps to address major issues faced by the industry, especially its liquidity problem and releasing the backlog of refunds. Industries demand additional lines of working capital and freezing of utility bills for at least two months to avoid their closure.
Sudden cancellation and postponement of exports orders means increase in output inventories that are imposing enormous cost on industry. Industries have started layoff of their daily-wage and temporary workers because they are unable to pay their workers due to liquidity crunch. With the crisis prolonging, industries foresee much more layoffs. At least for present, industries do not want to lay off their regular employees because of their investments in training and creating organizational culture. Until more is known about the likely length of the crisis, industries will remain highly risk averse.
Industrial firms, on their own, are also responding to the crisis in different ways. Many are trying to solve immediate cash-flow problems by cutting costs and seeking debt relief and compensation from the government. SMEs do not have assets to use them as collateral for loans. Employees are being put on short-time working and are asked to take leave to reduce the wage burden. The resultant personal income loss has, in turn, lowered both consumption and company revenues. Meanwhile, many companies have also reorganized their businesses to make use of telecommuting and e-commerce.
If the virus outbreak is short-lived then a standard mix of monetary policies (e.g., a cut in the policy discount rate) and automatic fiscal stabilizers (e.g., adjustment in tax rates and transfer payments to smooth incomes, consumption, and business spending) should be sufficient to reduce adverse impacts on the economy. But if the crisis prolongs, which now appears to be the likely case, then the economic recovery will depend more on sustained liquidity injections to targeted industries (especially SMEs), and pro-active fiscal, trade and investment policies.
Within the above perspective, an effective strategic response from the GoP in coordination with the private sector requires a proactive and targeted approach that this article advocates.
Government’s Economic Package
In view of the hardship faced by the industries, the Government and the State Bank of Pakistan (SBP) have announced the following economic package: (i) Rs.100 billion ($63 million) to support SMEs and the agriculture sector; (ii) reduction in the monetary policy rate to 9% to cushion the slowdown in growth; (iii) concessional credit at interest rate between 3-6% to exporters for working capital and new projects under Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF) scheme, respectively; (iv) SBP has reduced the performance requirement from twice to 1.5 times, extended time period to ship goods along with other relaxations to prevent liquidity problems from turning into solvency problems amongst exporters; (v) all banks, DFIs to defer repayment of principal loans by their borrowers for one year; (vi) regulatory limit on extension of credit to SMEs has been permanently increased from Rs. 125 million to Rs.180 million; (vii) the GoP is providing Rs. 200 billion of cash assistance for the daily wagers working in formal industries: 100% financing for up to a 3-month wage bill of Rs. 500m and up to 75% financing with maximum of Rs. 1 billion; and (viii) supplementary grant of Rs. 30 billion to payback duty drawbacks to textile exporters to improve their liquidity position.
These measures, at best, are going to satisfy immediate needs of the industries; however, industries would need short to medium term support from the GoP for transformation to operate under the new work environment.
Without any doubt, the crisis has weakened industries across the board. They need to confront the crisis with strength. The sudden reduction in demand and production is likely to have a long-lasting impact with high risk of many companies going bankrupt. This has already triggered a downward spiral in industries with rising unemployment; a situation which could be worsened with prolonged lockdown. Against this background, government’s response cannot remain based on the standard industrial strategy. A new industrial strategy would be needed to mitigate the immediate-, short- and medium-term impacts of the unprecedented situation. The way forward is targeted policy actions and coordination among stakeholders that effectively support and boost industries most affected by the crisis.
Whereas the government is actively engaged in assisting industries to manage with the situation, some large companies have started responding to the immediate crisis — taking steps to protect their workforce, supply chains and operations but not all companies have such capacity. Every enterprise is facing the challenge of adapting to the new ways of working such as social distancing, self-isolation, etc. Many enterprises are digitally innovating as digital transformation has become critical for their survival but not without stressing the existing IT infrastructure, systems and teams. This, therefore, requires leveraging of the digital channels to their fullest possible extent to keep commercial links with customers and partners as well as machines and assets in operation. Consequentially, capital has become more critical input than ever before to prepare companies to upgrade their outputs and reach markets. This requires companies to reprioritize investments and put on hold all non-essential investment programs, and launch cost reduction initiatives.
Immediate-term Strategy. To safeguard most impacted industries and their supply and value chains: (i) ensure health and safety procedures to combat the spread of the virus; (ii) ensure a minimum level of industrial activities when precautionary measures are in place to facilitate a future recovery; (iii) ensure the most resilient supply chains possible; (iv) maintain healthy relationship between enterprises and their contracted parties for delayed payments; (v) encourage enterprises to retain their employees who can least afford to lose their jobs and cut salaries of the executives rather than layoffs; and (vi) communicate with stakeholders to plan the right form of communication.
Short-term Strategy. To activate an industrial rebound may include: (i) counteracting increased risk aversion and prevent selling of less liquid investments, which could intensify financial stress, and thus curtailing access to resources needed to manage the consequences of the crisis; (ii) ensuring continued protection of workers, a quick rebooting of domestic supply as well as restoring — and eventually reshaping — the full functioning of supply chains; and (iii) public procurement and innovation in products and processes would be necessary, including investments in new technologies.
Not all industries are impacted in the same proportions hence the need for a targeted response should include: (i) conduct of detailed impact analysis of the crisis for different industries to design a targeted recovery plan; (ii) inject massive liquidity to safeguard the most risky value-chains, including SMEs; (iii) design a recovery plan that prioritizes the new financing to support the recovery and the transformation towards a new work environment; and (iv) postpone for some time legislative measures when post-crisis impact assessments show that these measures would bring marginal benefits.
Medium-term Strategy. For smooth transformation of industries in the post-pandemic era. The rise of the virtual activities will vastly change the industrial structure. The future of the industries will greatly depend on the lessons learned from the on-going experience.
To prepare for the future, the GoP needs to: (i) develop a culture of data sharing between its departments and functions to make Big Data-driven governance a reality. It is increasingly being realized that there is a lot about industries that is not known simply because a large part of the economy remains informal — availability of data in planning and decision-making is extremely important — this is the right time for the government to register all informal firms without any distinction; (ii) assign a task force to identify and then eliminate unnecessary red tape, bottlenecks, and ineffective regulations adversely affecting industrial performance.
Disruptions to production and consumption have left many companies strapped for cash, they are now vigorously trying to optimize their efficiency and reduce costs. In this context, many companies have opted for cloud-based services as the main alternative. Such practices are inducing other companies to take a longer-term view and adopt such alternatives but which calls for: (i) a more flexible workforce and digitally-enabled workplace; (ii) differentiated and robust supply chains by customer segments; (iii) resilient IT infrastructure and systems; and (iv) enduring digital channels and e-commerce platforms.
The impact on start-ups is severe as they have low cash reserves and lack the ability to manage sudden crisis. To alleviate their risks, start-ups need to: (i) repeatedly evaluate the financial health of the company for planning ahead; (ii) reexamine feasibility of business model focusing on the revenue and cost; and (iii) effective planning for all scenarios.
Policy measures are needed in three distinct areas: (1) safeguarding continued operation of industries; (2) mobilizing industries towards critical supplies; and (3) supporting post-crisis industrial growth. Table 1 provides a list of policy measures that combines newly emerged measures and old measures that are fine-tuned and repurposed. These measures can be intensified in the later stages of the recovery-phase with a view to restructuring the industrial sector. The reshaped industrial sector would only be protecting targeted essential industries otherwise it should remain open for foreign competition.
To conclude, reopening of industries would demand flexibility and close monitoring to allow for an orderly phasing out of initial interventions, to incentivize industrial restructuring and avoid ‘policy capture by rent-seekers’ or ‘free-riding’ behaviors. The recovery from the crisis might not allow a return to pre-crisis normality. Policies to support new alternatives for the reorganization of production networks and reorient production capabilities should represent an important component of the new industrial strategy to build resilience against any future disruption. All options should be explored, including repurposing old policy measures, introducing new ones, and bolstering ongoing public and private efforts. A sustainable long-term winning recovery strategy demands a commitment from all stakeholders to bridge capability gaps by investing in people and in the areas of network security, digital working environments, cloud services, artificial intelligence and automation. This would require close coordination to support the most vulnerable and severely affected industries. The pandemic has shown the importance of being prepared and managing crises. It has also demonstrated that postponing of bold decisions can impose enormous costs. This is the time to act in the right direction with vigor.
The writer is a Professor of Economics at the School of Social Sciences and Humanities at National University of Sciences and Technology (NUST).
E-mail: [email protected]
Read 526 times