The outbreak of the Coronavirus disease-2019 (Covid-19) has severely affected Pakistan’s financial market. The country’s already fragile financial market had only just been moving towards stability when the pandemic struck. Various enterprises in the market face specific challenges that are hindering their growth.
Notably, the fall in demand and supply due to the closure of business and the fall in Foreign Direct Investment (FDI) has drastically undermined the country’s financial market. Small and medium enterprises (SMEs), as compared to large-scale enterprises, are facing more difficulties because of their meager financial resources. Small and medium enterprises (SMEs) are the Economy’s backbone as these contribute 40% to the Gross Domestic Product (GDP).
The financial system consists of financial institutions and the market infrastructure that connects them. According to the World Bank, with the emergence of Covid-19, the GDP growth of Pakistan will shrink by 2.2%, which can further diminish the financial market’s performance. The continuous negative impacts of the health crises are still ambiguous. The hurdles in the way of vaccine reaching the market further make the situation difficult. To improve the country’s financial market, the government needs to help SMEs, launch new venues for foreign direct investment, and devise a robust monetary policy.
Listed below are the impacts of the Covid-19 on Pakistan’s financial market. The country can stabilize its Economy through essential measures.
The downfall of the Economy
For a long time, the Economy of Pakistan has been facing difficulties in its development. The Economy’s significant sectors are services, agriculture, and manufacturing that employ most people. The outbreak of Coronavirus has affected the performance of the Economy by shutting down business activities and putting the country in a debt-trap.
So far, Pakistan has registered 585,435 cases of Covid-19, which are rising. On the other hand, the government has failed to chart a viable plan to curb the rise of infections. The Economy of the country is shrinking, unemployment rising, and various sectors are in crisis. The government has lost one-third of its revenue, and exports have dropped by 50% since the pandemic outbreak.
The lockdown’s immediate impact is the halt of business operations, as most of the industry in the country lay idle. The closure of SMEs has increased unemployment in the country by 3%.
Fall in Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is crucial for the growth of an economy. The developing countries worldwide find it difficult to attract FDI because of their infrastructural issues. Before the pandemic outbreak, Pakistan was opening its Economy to new ventures such as tourism to attract FDI. The country saw a rise of around USD 0.5 billion in FDI, which has been on a downfall since the beginning of the COVID-19.
In 2019, Pakistan reached out to the International Monetary Fund (IMF) for a bailout package worth six billion dollars. This bailout package has not delivered any benefit to the country’s financial market. As more and more foreign businesses are closing down in the country, the financial market stays unstable.
Impact on the Banking Sector
The banking sector is one of the essential pillars of any financial market. A bank acts as an intermediary financial institution that creates money and provides loans for multiple purposes. Today, several banks are operating in Pakistan, which has helped the financial market proliferate.
With the closure of few reopening sectors, including travel, the ratio of business income and deposits falls, and banks have to lower the interest rate. Likewise, the rise in inflation has made the financial market’s operation difficult. In addition to this, it is difficult for people to perform any cash-related transactions, which s results in the downfall of such economic activities. It is one of the banks’ prime duties to assist the government in socio-economic development; however, with the bank’s restricted movements in the past, the monetary policy’s successful conduct could not take place.
Undermined Performance of the Stock Exchange
The rise in the dollar value compared to the Rupee has undermined the performance of the Pakistan Stock Exchange (PSX) in the past few years, with some stability shown in recent days. The Rupee’s depreciation has remained a thorny issue for the country’s financial market. With the outbreak of Covid-19, severe fluctuations were recorded in the PSX in the early stages. The disease creates a situation of uncertainty that led to businesses’ closure. According to finance experts, the virus outbreak has drastically undermined the stock exchange’s performance by affecting trade and industry.
What Can Pakistan Do to Stabilize its Financial Market?
The negative impacts of Covid-19 are present in financial markets worldwide. Stabilizing the financial market is a big challenge for policymakers in Pakistan. Thousands of employees in different sectors have lost their jobs since the pandemic outbreak. The government has proposed various strategies to curb the rise of infections in the country. However, so far, it has not submitted a viable approach to tackle the financial market’s downfall.
These are the most difficult times for the Economy of Pakistan, where there is a dire need for a firm policy to tackle the virus’s impact. To stabilize the market, the challenges faced by multiple sectors have to be addressed comprehensively.
Instead of hurtling the IMF and the World Bank for the loan, the government needs to support SMEs to stabilize the financial market. The responsibility of stabilizing the financial market does not solely rely on the government, but each organization must play its positive role. The protection of employees from the virus will reduce the number of infections. The government needs to ensure information accuracy to put the financial market out of ambiguity.
To boost the Economy, Pakistan needs to attract FDI and open its Economy towards multiple business ventures. The government needs to finance the cash-strapped enterprises to continue their business. To revive the financial services sector, a viable monetary policy is required so that its benefits can reach the grass-roots level. The government should provide subsidies to large-scale enterprises to reduce their financial burdens for some time until things get back on track.