The devastating COVID-19 pandemic has driven Pakistan’s government to table a “COVID Budget” before the Parliament on June 12, 2020 with the focus to resuscitate the economic activities knocked out by the lockdowns imposed to impede the spread of this deadly contagion that seems to be virtually unstoppable all over the world.
The situation is still fluid, and the policymakers are clueless how long this lockdown-like situation is going to persist in this part of the world.
Despite such a confusing state of affairs, the budget-makers are right now crunching numbers to set a direction for the economy in the next fiscal year 2020-21. The country’s GDP growth rate nosedived to negative 0.38 percent in the outgoing fiscal year FY2020, the lowest since 1951-52. The size of the economy had shrunk by $50.6 billion in last two years instead of witnessing any increase probably for the first time in the country’s history.
First of all, there is a need to compare the economic performance of the incumbent regime’s two years in power with the PML -N-led government’s five years to put economic realities in proper prospective.
In rupee terms the size of economy has increased but mainly because of mounting inflationary pressure. With the exclusion of inflationary figures, the real increase in size of economy showed stagnating trends at a time when the demand on expenditure side was on rising side every passing year.
The size of economy, under the previous regime, stood at $315.1 billion in fiscal year 2017-18 and nosedived by $50 billion in the outgoing fiscal year 2019-20, coming down to $264.5 billion. “Such a massive decline in the size of economy clearly indicates that the pie of total size of the economy has contracted significantly instead of expanding in the last two years,” a top economist stated.
The actual figure of inflation stood at 2.4 percent during the PML-N’s last regime in 2017-18 and it had now increased phenomenally, and it was projected to remain at 9.1 percent on average in the outgoing fiscal year 2019-20 under the Pakistan Tehreek-e-Insaf regime. On macroeconomic front, the real GDP growth stood at 5.79 percent in accordance with provisional growth figure during PML-N government in 2017-18, which was reduced to 5.5 percent of GDP in the revised actual figures.
However, the real GDP growth under PTI government contracted to negative 0.38 percent in the outgoing fiscal year 2019-20 against revised actual growth figure of 1.9 percent for the last fiscal year 2018-19. Earlier, the provisional growth figure was estimated at 3.29 percent for FY 2018-19.
During PML-N era, the agriculture growth stood at 4 percent in 2017-18, but decreased to 2.7 percent in the outgoing fiscal year under PTI’s economic managers. The major crops came down from 3.6 percent growth in 2017-18 to 2.9 percent in 2019-20. The livestock sector growth decreased from 3.7 percent in 2017-18 to 2.6 percent in 2019-20.
The overall industrial sector growth rate nosedived from positive 5.4 percent in 2017-18 to negative 5.6 percent in 2019-20. The large scale manufacturing (LSM) contracted massively as it decreased from positive 5.1 percent in 2017-18 to negative 7.8 percent in 2019-20.The services sector decreased from actual growth figure of 6.3 percent in 2017-18 to negative 0.6 percent in 2019-20.
On the fiscal side, the budget deficit that is considered the mother of all economic ills, stood at 6.6 percent of GDP in 2017-18 under PML-N and is projected to balloon to 9.6 percent of the GDP at least in outgoing fiscal year. The Federal Board of Revenue’s (FBR) revenue collection stood at Rs3,842 billion in fiscal year 2017-18, which is now expected to touch Rs3,850 billion by the end of the outgoing fiscal year 2019-20.
The FBR revenues almost doubled during the five-year tenure of PML-N government as it increased from Rs1,938 billion in 2012-13 to Rs3,842 billion in 2017-18. However, the FBR collection in the last two years remained almost stagnant indicating the revenue growth remained zero in last two years. A member of newly-constituted National Finance Commission (NFC) said the real problem was the inability to increase the size of existing cake of available resources.
“The tax revenues, for the last five years, were not increasing as desired as during the first three years of PML-N government the FBR’s tax to GDP ratio increased 2.5 percent from 10 to 12.5 percent but then the revenue generation lost momentum,” he said. He did not explain but it was the period when the Panama case had surfaced and then the revenue collection spiraled downwards.
Pakistan Institute of Development Economics (PIDE) in its latest research study on economic situation stated that the COVID-19 outbreak was sure to impact Pakistan’s economy in the fiscal years 2020 and 2021.
The projections are made for a baseline scenario (the optimistic scenario) as well as for three alternate scenarios: the summer surge, the second outbreak, and the prolonged second outbreak.
The annualised GDP growth rate for the FY20 would be in the range of -1.36 -0.62 percent. The range of growth for the industry would remain in the red, whereas that of the agriculture is expected to remain positive. The services sector has also been severely hit.
The decline in growth would translate into an expected fall by 10 percent in revenues and an expected increase of 25 percent in expenditures in FY20 as compared to FY19. Fiscal deficit and fiscal support for COVID-19 are estimated to be 14 percent and 3 percent of the GDP, respectively. On the monetary front, inflation, and interest rate would remain around 8 percent in the last quarter. Despite the global lockdown, the current account as a percent of the GDP is expected to be 0.3 percent primarily due to the inflow of remittances worth $22.1 billion. The nosedive in GDP growth could result in unemployment of 4.23 million accompanied by 12.3 million layoffs, thereby putting 67 million people in poverty.
Building on the four scenarios for fiscal year 2021, the study reached at the conclusions that in the baseline scenario, which assumes that the lockdown would completely come to an end in FY20, the annual growth rate for FY21 is expected to bounce back to 2.16 percent -a projection consistent with IMF’s projection for Pakistan. In the worst-case scenario, where the pandemic and consequent economic disruptions are expected to continue until the third quarter of the next fiscal year, the growth rate would be negligible (0.4 percent).
A single-digit and stable interest rate is also expected. Although the current account deficit is expected to hover around 1-2 percent of the GDP, there would be significant fluctuations in the volume of exports and imports across scenarios, while remittances are expected to drop substantially by the end of the next fiscal year.