Impact of the negative shocks

Pakistan has experienced the impact of an unusually large number of negative shocks after 2019. The shocks have either been of a global nature and affected every country or of a local origin impacting, thereby only the national economy. The objective of this article is to assess the impact on the economy of these negative shocks and the reason why Pakistan has generally been more vulnerable than other developing economies, including those in South Asia. The first global shock in the last seven years was the spread of the pandemic, COVID-19, in the early months of 2020. The widespread incidence of this disease was never seen before. The second global shock began in February, 2022, when Russia launched a widespread invasion of Ukraine. This led to an explosion in oil price from close to USD 60 per barrel to the peak of USD 115 per barrel by July, 2022. We now have the makings of a third global shock. This is the consequence of the ongoing war in the Middle East, between Iran and the USA with Israel. The damage to oil and gas reserves and to energy infrastructure and refineries along with the cessation of traffic in the Strait of Hormuz has caused already within three weeks a big spike in the price of oil. It has risen from USD 64 per barrel of Brent crude prior to the war to USD 112 per barrel. Beyond these three big global shocks, there have also been negative shocks within Pakistan during the last seven years. The first shock was the worst floods in 2022-23. There was damage estimated at as much as USD 30 billion. More recently there have also been floods in the early months of 2025-26. Further, there is the spate of rising acts of terrorism recently in Pakistan which have led effectively to a war with Afghanistan. There is a need to quantify first the impact of Covid-19. Large-scale efforts were made to reduce physical interaction among people to limit the spread of the highly infectious disease by closure of work places. Despite these restrictions, there were as many 1. 6 million COVIRUS cases in the country and 30, 664 deaths due to the disease. The primary impact of the epidemic was on the growth rate of the GDP. Since it started early in 2020, the change in GDP growth rate in the calendar year, 2020, has been estimated in comparison with the GDP growth in calendar year, 2019. The surprising finding is that the fall in GDP growth rate was lower in Pakistan as compared to the other economies of South Asia. There was a massive fall in the growth rate in India to negative 5. 8 percent in India, followed by negative growth rate in Sri Lanka of 4. 6 percent. Pakistan saw a decline in the GDP of 1. 3 percent points. Bangladesh was the only country with a positive growth rate of 3. 5 percent, although it declined by 4. 4 percent points. Turning to the big oil price shock starting in early 2022 after the commencement of war between two major oil producers, Russia and Ukraine, the impact was critically dependent on the level of foreign exchange reserves at the time of the shock. Among South Asian countries the highest level was in India, equivalent to almost 10 months of imports. Bangladesh also had a high level of reserves enough to finance 6. 3 months of imports. Sri Lanka and Pakistan were two countries of South Asia with relatively low reserves. Pakistan had reserves equivalent to 3 months of imports, while it was only 1. 6 months of imports with Sri Lanka. Consequently, the impact on the balance of payments and the economy has varied greatly due to the rise in the oil import bill. Sri Lanka effectively defaulted in April 2022 and Pakistan saw foreign exchange reserves fall to only USD 6 billion by the end of 2022. Fortunately, Pakistan was able to avoid default by the timely commencement of the IMF Stand-by Facility. Between 2021 and 2022 the total import bill of Pakistan increased by over 36 percent. Both Sri Lanka and Pakistan saw a quantum depreciation in the value of the currency with respect to the US$. It fell by over 37 percent in the case of Pakistan and 52 percent in Sri Lanka. Consequently, both countries experienced a quantum jump in the rate of inflation. It rose to 49. 7 percent in 2022 in Sri Lanka and with a somewhat staggered impact to 30. 8 percent in 2023 in Pakistan. The GDP growth rate actually turned negative in both Sri Lanka and Pakistan. The various global and national negative shocks have led to a large plummeting of the GDP growth rate since 2018 in Pakistan. It turned negative in 2020 by 1. 3 percent due to the Covid-19 pandemic. The spurt in oil prices and the floods led to a decline in GDP of 0. 4 percent in 2023, after the oil price shock. In fact, the average annual GDP growth rate of Pakistan from 2019 to 2025 has been only 2. 5 percent. This is one of the lowest growth rates since the decade of the 50s. Overall, prior to 2019, the average growth rate had been 4. 8 percent. The consequence of the big loss of growth momentum since 2018 is attributable not only to the negative shocks but also due to the failure to make appropriate policy adjustments and reforms to reduce the negative impact of the shocks. The world finds itself again in a situation of oil and gas shortages due to the war in the Middle East. The oil price has already increased by over 72 percent to USD 112 per barrel. This is likely to increase further if the conflict persists. The impact is going to be higher this time on the GDP due to shortage of energy imports. The inflationary impact will depend on the magnitude of change in the value of the rupee and the price impact of shortages of basic goods and services, along with the rise generally in transport costs. Fortunately, Pakistan has a relatively high level of reserves currently at over USD 16 billion and also has the umbrella of an on-going IMF programme. It will also be a market test of the performance of the Government in managing the negative shock with only limited financial resources to absorb the quantum increase in oil price. There has already been a big rise in unemployment and incidence of poverty in Pakistan since 2018. Further worsening must be avoided. (The writer is Professor Emeritus at BNU and former Federal Minister) Copyright Business Recorder, 2026

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