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Pakistan’s small businesses hit hard by COVID-19

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Small businesses in Pakistan have been adversely affected by the Covid-19 pandemic. The low demand at home, disruptions in supply chains, constraints in international trading, and expected prolonged lockdowns are now leading to severe cash flow problems, the inability to pay back debts and cancellation of orders from clients. 

This rising uncertainty is gradually leading them to lay off employees which will have welfare implications. In some sectors where recovery is difficult to predict, small businesses have started planning for the worst: complete shutdown. This crisis could also imply a much bleaker outcome for the startup ecosystem in Pakistan.  

The government has announced a SME relief package. The central bank has also come forward to relieve some of the funding and finance related concerns of private enterprises. Yet, many micro and small businesses do not understand how to apply or if they are eligible, to receive such assistance. There are others who argue that this one off relief may not be enough given that businesses are going to face depressed demand for a longer term. Pakistan’s past record of small businesses trying to access such fiscal packages is also not encouraging, partly because many such firms do not access formal banking channels for their needs or banks impose steep collateral requirements. Also, large segments of micro enterprises have the entire or some components of their businesses in the informal sector.

Federal and provincial governments have two issues to address now: how to ensure that small businesses are able to access and utilize existing government-provided assistance, and secondly, what more can be done to support private enterprise in these times.

A progressive fiscal policy and commitment to redistributive taxation is in line with the spirit of Riasat-e-Madinah to which Prime Minister Imran Khan often refers to. A sincere effort is required to reduce the burden of compliance costs faced by small firms- often filing returns several times during a year and to multiple tax bodies across the country. 

Dr. Vaqar Ahmed

On the former, it would be best to start by addressing information and outreach gaps. As the problems for businesses are evolving in real-time, hence there remains a need for structured and more frequent public-private dialogue which should be inclusive enough to also give representation to women, youth-led firms and social enterprises. Such a dialogue will also give a sense to the government about how these businesses will get affected in the forthcoming rounds of Covid-19.

On the latter, I believe the forthcoming budget for the fiscal year 2020-21 should be seen as an opportunity not only to provide support to collapsing businesses but also to put in place economic incentives that encourage enterprises to consider resilient business models. A large part of this has to do with reimagining a better taxation regime.

A progressive fiscal policy and commitment to redistributive taxation is in line with the spirit of Riasat-e-Madinah to which Prime Minister Imran Khan often refers to. A sincere effort is required to reduce the burden of compliance costs faced by small firms – often filing returns several times during a year and to multiple tax bodies across the country. It is an opportunity now to automate, rationalize or eliminate several filing and payment layers in taxation to ultimately help reduce the cost of doing business.

After a lot of persuasion from local think tanks and the International Monetary Fund (IMF), federal and provincial governments agreed to establish a National Tax Council (NTC) to harmonize the general sales tax (GST). 

Currently all provinces have a different structure of GST on services. There are also issues regarding definition of certain activities which the federal government may assume to be under its jurisdiction. Perhaps smaller firms have been the hardest hit due to the fragmented tax structure across the federation and it is time now to expedite NTC’s establishment and work in this direction. Even when the system is finally harmonized, the GST should not be collected by multiple windows at federal and provincial levels. A unified tax return and collection should be made possible through online mechanisms.

It will also be timely to think about which sectors should be motivated to scale up production and services in the face of this health-related emergency. Hospitals and private clinics operating at micro, small, and medium scale are primary candidates for cut in GST on services and even rationalization in direct tax rates. Firms producing personal protective equipment should also see a relief in taxes. The trade taxes faced by such producers or even hospitals importing from abroad need to be revisited. The agro-based and food processing enterprises will need similar help as their input supplies face price and supply volatilities.

Covid-19 also increased demand on several other sectors providing essential services. Our policy circles have rarely seen these sectors as important for the social and mental wellbeing of society until the pandemic struck. It will now be timely to recognize the services of firms (including schools) providing online services. The economic policy managers must think out of the box how best to leverage e-commerce in the battle against Covid-19. 

– Dr. Vaqar Ahmed is an economist and former civil servant. He is author of ‘Pakistan’s Agenda for Economic Reforms’ published by the Oxford University Press. Twitter: @vaqarahmed

Courtesy : ArabNews

China

What will the post-COVID world look like?

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Although virologists have been warning of the risks of a global pandemic since the SARS outbreak in 2003, the world was still mostly unprepared when confronted with the COVID-19 crisis. However, it was also unlucky.

It was unfortunate that the pandemic came in the run-up to a US presidential election that has created an environment as politically polarized as any the country has experienced. As a result, much of the US media coverage of, and debate about, the virus and the global policies needed to deal with its effects have been more about the presidential race rather than the pandemic.

This has obviously had a clear effect on international politics because of the importance of the role of the US and its global leadership.

It was also bad luck that the health crisis came at a time of high tensions between the US and the second largest global power, China, where the virus originated. This further complicated any potential global unified response.

As a result of the global uncertainty, it is difficult to forecast how critical aspects of the crisis, which seems likely to continue for at least another 12 months, will play out in the Middle East, and also what a post-COVID world might look like.

One certainty is that most countries will be forced to shift their focus and resources to domestic matters rather than regional issues.

The virus and the resultant shutdowns imposed to “flatten the curve” of infections have had, and will continue to have, devastating consequences on economies and national budgets. It seems that despite the soft reopening of parts of economies around the world, the current health concerns will prevent a full restoration of business activities for some time, especially if the number of infections and deaths start to rise again after governments relax precautionary measures.

In our increasingly interconnected world, it is difficult to determine whether any country will come out on top economically, and consequently geopolitically, especially given mounting levels of debt.

Countries able to borrow in their own currency seem to be at an advantage; this applies mainly to the US and the EU (if the European countries can unify their policies), and indirectly also explains the current debate in the Gulf about the unpegging of currencies.

Another certainty is that with less money available, wars and proxy wars will become prohibitively expensive and all parties will be forced to scale down their ambitions. As a result, aggression will be reduced and consensus and agreement might be more readily reached. Countries and their allies or proxies who have refused to sit at the negotiation table might now change their minds and mellow, or perhaps even be forced to completely withdraw from conflict zones.

Take Iran, for instance, which has been targeted recently by a successful US policy of maximum pressure. The country is facing problems domestically and, with the added pressure of low oil prices, it will be less able to maintain its financial support to the Houthis in Yemen, the militias in Iraq, and Hezbollah.

Does that mean Tehran will cease its meddling? Nothing is certain but domestic turmoil might force it to do so.

As Iran’s problems have grown, the region has witnessed during the COVID-19 pandemic the emergence of a more assertive Turkey. This has happened despite the fact the country is also suffering economically.

It has been a long time in the making. Turkish involvement has spread to many regional issues beyond its normal national security zone. Its involvement in neighboring Syria is understandable, given that the conflict there directly threatens Turkey’s security. More interesting is the Turkish interest in Libya, where Ankara is pushing for a continued presence with no apparent direct threat or rationale to explain this. This is happening while it also increases political rhetoric that promises continued interference in the domestic affairs of Arab countries in the years to come.

A closer look at the issues reveals that Turkey is focusing its involvement on key points on Europe’s energy routes. This is not surprising, as Europe remains Ankara’s main and constant focus. So, Turkey is now directly competing with Russia — the biggest supplier of gas to Europe — in Syria, where Iran is also strongly entrenched as the country is a key Mediterranean access point for its gas and energy deliveries to Europe.

Turkey is challenging Russia for control of the tap that provides Europe with its energy stability, and this explains its involvement in Libya and other countries. The same logic explains Ankara’s negative reaction to the Israeli-Greek-Cypriot gas-pipeline project, EastMed. This motivates its strategy, as it hopes to leverage it to make more gains in the region.

Therefore, we can expect an increased Turkish focus on the Mediterranean and on supply-chain routes and access points for energy, as well as merchandise being shipped from the East to Europe.

On that point, the land routes of China’s Belt and Road Initiative include one that goes through Russia and another that passes through Turkey. This massive project is also something Turkey is well aware of, and Ankara is striving to ensure it has a presence on key points along the BRI’s Maritime Silk Road. Once again, it is being guided not by national security concerns but a desire to increase its regional clout.

It is difficult to forecast how critical aspects of the corona crisis will play out in the Middle East. 

Khaled Abou Zahr

While Russia and Turkey face off on the ground over an increasing number of issues, it is interesting to note the apparent lack of any direct involvement by the US or China, the two biggest global powers, and, surprisingly, the total absence of European nations, which should be the most concerned about what is happening.

In weighing how global and regional powers will direct their foreign policies and manage existing conflict zones, their own domestic political, economic and social stability will play an important role.

Yet, apparent weaknesses might invite bold moves and dangerous power-grab attempts. This delicate balance will be the key driver for international policies in the coming years. One might say that uncertainty and volatility have spread from the stock-markets to the geopolitical arena.

  • Khaled Abou Zahr is the CEO of Eurabia, a media and tech company. He is also the editor of Al-Watan Al-Arabi.

Courtesy : Arabnews.pk

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China

US warns of ‘consequences’ if China abandons trade deal

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US Treasury Secretary Steven Mnuchin said on Monday he expects China to uphold a trade deal reached with Washington this year, and warned of “consequences” if the country did not.

The comments come amid a sharp drop in global trade caused by the coronavirus pandemic as well as a dispute between the two powers over fault for the spread of the virus, which first broke out in Wuhan, China.

The US and China in January signed an agreement to end a nearly two year-long trade war, that included a commitment by Beijing to buy an additional $200 billion in American goods over the next two years.

“I’m expecting them to meet their obligations,” Mnuchin said on Fox Business Network.

“I have every reason to expect that they honour this agreement and if they don’t, there would be very significant consequences in the relationship and in the global economy as to how people would do business with them.”

Ties strained

However, relations between Washington and Beijing have soured in recent weeks, with US President Donald Trump blaming China for the pandemic, and threatening tariffs.

The US has been hit with tens of millions of layoffs as the virus has spread, significantly weakening the previously solid economy, which Trump was counting on to win re-election in November.

The trade agreement signed in January includes $77.7 billion in additional purchases from the manufacturing sector, $52.4 billion from the energy sector and $32 billion in agricultural products.

The US currently runs a trade deficit with China, and the objective is to realign the trade balance between the two countries.

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Covid-19

World Bank Predicts Sharpest Decline of Remittances in Recent History

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Global remittances are projected to decline sharply by about 20 percent in 2020 due to the economic crisis induced by the COVID-19 pandemic and shutdown. The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country. Remittances to low and middle-income countries (LMICs) are projected to fall by 19.7 percent to $445 billion, representing a loss of a crucial financing lifeline for many vulnerable households.

Studies show that remittances alleviate poverty in lower- and middle-income countries, improve nutritional outcomes, are associated with higher spending on education, and reduce child labor in disadvantaged households. A fall in remittances affect families’ ability to spend on these areas as more of their finances will be directed to solve food shortages and immediate livelihoods needs.

Remittances are a vital source of income for developing countries. The ongoing economic recession caused by COVID-19 is taking a severe toll on the ability to send money home and makes it all the more vital that we shorten the time to recovery for advanced economies,” said World Bank Group President David Malpass. “Remittances help families afford food, healthcare, and basic needs. As the World Bank Group implements fast, broad action to support countries, we are working to keep remittance channels open and safeguard the poorest communities’ access to these most basic needs.”

The World Bank is assisting member states in monitoring the flow of remittances through various channels, the costs and convenience of sending money, and regulations to protect financial integrity that affect remittance flows. It is working with the G20 countries and the global community to reduce remittance costs and improve financial inclusion for the poor.

Remittance flows are expected to fall across all World Bank Group regions, most notably in Europe and Central Asia (27.5 percent), followed by Sub-Saharan Africa (23.1 percent), South Asia (22.1 percent), the Middle East and North Africa (19.6 percent), Latin America and the Caribbean (19.3 percent), and East Asia and the Pacific (13 percent).

The large decline in remittances flows in 2020 comes after remittances to LMICs reached a record $554 billion in 2019. Even with the decline, remittance flows are expected to become even more important as a source of external financing for LMICs as the fall in foreign direct investment is expected to be larger (more than 35 percent). In 2019, remittance flows to LMICs became larger than FDI, an important milestone for monitoring resource flows to developing countries.

In 2021, the World Bank estimates that remittances to LMICs will recover and rise by 5.6 percent to $470 billion. The outlook for remittance remains as uncertain as the impact of COVID-19 on the outlook for global growth and on the measures to restrain the spread of the disease. In the past, remittances have been counter-cyclical, where workers send more money home in times of crisis and hardship back home. This time, however, the pandemic has affected all countries, creating additional uncertainties.

Effective social protection systems are crucial to safeguarding the poor and vulnerable during this crisis in both developing countries as well as advanced countries. In host countries, social protection interventions should also support migrant populations,” said Michal Rutkowski, Global Director of the Social Protection and Jobs Global Practice at the World Bank.

The global average cost of sending $200 remains high at 6.8 percent in the first quarter of 2020, only slightly below the previous year. Sub-Saharan Africa continued to have the highest average cost, at about 9 percent, yet intra-regional migrants in Sub-Saharan Africa comprise over two-thirds of all international migration from the region.

Quick actions that make it easier to send and receive remittances can provide much-needed support to the lives of migrants and their families. These include treating remittance services as essential and making them more accessible to migrants,” said Dilip Ratha, lead author of the Brief and head of KNOMAD.


Regional Remittance Trends

Remittance flows to the East Asia and Pacific region grew by 2.6 percent to $147 billion in 2019, about 4.3 percentage points lower than the growth rate in 2018. In 2020, remittance flows are expected to decline by 13 percent. The slowdown is expected to be driven by declining inflows from the United States, the largest source of remittances to the region. Several remittance-dependent countries such as those in the Pacific Islands could see households at risk as remittance incomes decline over this period. A recovery of 7.5 percent growth for the region is anticipated in 2021. Remittance costs: The average cost of sending $200 to the East Asia and Pacific region dropped to 7.13 percent in the first quarter of 2020, compared to the same quarter in 2019. The five lowest cost corridors in the region averaged 2.6 percent while the five highest cost corridors averaged 15.4 percent as of 2019 Q4.

Remittances to countries in Europe and Central Asia remained strong in 2019, growing by about 6 percent to $65 billion in 2019. Ukraine remained the largest recipient of remittances in the region, receiving a record high of nearly $16 billion in 2019. Smaller remittance-dependent economies in the region, such as Kyrgyz Republic, Tajikistan, and Uzbekistan, particularly benefited from rebound of economic activity in Russia. In 2020, remittances are estimated to fall by about 28 percent due to the combined effect of the global coronavirus pandemic and lower oil prices. 

Remittance costs: The average cost of sending $200 to the ECA region declined modestly to 6.48 percent in the first quarter of 2020 from 6.67 percent a year earlier. The differences in costs across corridors in the region are substantial; the highest costs for sending remittances were from Turkey to Bulgaria, while the lowest costs for sending remittances were from Russia to Azerbaijan.

Remittances flows into Latin America and the Caribbean grew 7.4 percent to $96 billion in 2019. Growth in inflows was uneven across countries in the region. Brazil, Guatemala and Honduras saw a rise in remittances of more than 12 percent in 2019. Colombia, Ecuador, Nicaragua and Panama had an increase of more than 6 percent, while remittances to Bolivia and Paraguay declined by 3.8 percent and 2.2 percent, respectively.

In 2020, remittance flows to the region is estimated to fall by 19.3 percent. Remittance costs: The average cost of sending $200 to the region was 5.97 percent in the first quarter of 2020. Amid the COVID-19 crisis, the costs of transferring remittances to the region could increase due to operational challenges being faced by remittance service providers (closures of agents and offices, access to cash, foreign exchange, security) and compliance with AML/CFT regulations.

Remittances to the Middle East and North Africa region are projected to fall by 19.6 percent to $47 billion in 2020, following the 2.6 percent growth seen in 2019. The anticipated decline is attributable to the global slowdown as well as the impact of lower oil prices in GCC countries. Remittances from the euro area would also be impacted by the area’s pre-COVID-19 economic slowdown and the depreciation of the euro against the U.S. dollar.

In 2021, remittances to the region is expected to recover, albeit at a slow pace of around 1.6 percent due to projected moderate growth in the euro area and weak GCC outflows. Remittance costs: The cost of sending $200 to the region was 7 percent, largely unchanged from the previous year. Costs vary greatly across corridors. The cost of sending money from high-income OECD countries to Lebanon continues to be in the double digits. Sending money from GCC countries to Egypt and Jordan costs between 3 percent to 5 percent in some corridors. The Saudi Arabia to Syria corridor has experienced a dramatic fall in costs as the civil war in Syria has receded.

Remittances to South Asia are projected to decline by 22 percent to $109 billion in 2020, following the growth of 6.1 percent in 2019. The deceleration in remittances to the South Asian region in 2020 is driven by the global economic slowdown due to the coronavirus outbreak as well as oil price declines. The economic slowdown is likely to directly affect remittance outflows from the United States, the United Kingdom, and EU countries to South Asia.

Falling oil prices will affect remittance outflows from GCC countries and Malaysia. Remittance costs: South Asia had the lowest average remittance costs of any region, at 4.95 percent. Some of the lowest-cost corridors had costs below the 3 percent SDG target. This is probably due to high volumes, competitive markets, and deployment of technology. But costs are well over 10 percent in the highest-cost corridors due to low volumes, little competition, and regulatory concerns. Banking regulations related to AML/CFT raise the risk profile of remittance service providers and thereby increase costs for some receiving countries such as Afghanistan and sending countries such as Pakistan.

Remittances to Sub-Saharan Africa registered a small decline of 0.5 percent to $48 billion in 2019. Due to the COVID-19 crisis, remittance flows to the region are expected to decline by 23.1 percent to reach $37 billion in 2020, while a recovery of 4 percent is expected in 2021. The anticipated decline can be attributed to a combination of factors driven by the coronavirus outbreak in key destinations where African migrants reside including in the EU area, the United States, the Middle East, and China.

These large economies host a large share of Sub-Saharan African migrants and combined, are a source of close to a quarter of total remittances sent to the region. In addition to the pandemic’s impact, many countries in the Eastern Africa region are experiencing a severe outbreak of desert locusts attacking crops and threatening the food supply for people in the region. 

Remittance costs: Sending $200 remittances to the region cost 8.9 percent on average in the first quarter of 2020, a modest decrease compared with the average cost of 9.25 percent a year before. The most expensive corridors are observed mainly in the Southern African region, with costs as high as 20 percent. At the other end of the spectrum, the less expensive corridors had average costs of less than 3.6 percent.

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