Stress testing of households using micro-data: evidence from a developing country

We assess the impact of income, consumption, and asset price shocks on the financial vulnerability of Pakistani households. We find 47.4% and 58.5% of households as financially vulnerable under basic living costs (BLC) and consumption-based criteria respectively. We note greater changes in the proportion of household financial vulnerability in the consumption-based approach as compared to BLC even for the same magnitude of the shock. We also note the severer impact of income rather than consumption shocks and add new dimensions to the financial vulnerability analysis by reporting results against various socio-economic characteristics of the households. Our stress testing results can be used for the development of targeted, community-specific social safety net programs and emergency cash support initiatives taken under a macroeconomic policy framework aiming at mitigating the effects of the COVID-19 external shocks. We recommend the use of household-level actual consumption expenditures in the analysis of household financial vulnerability instead of BLCs in developing countries like Pakistan.