While elaborate figures will not fill an empty stomach, equitably sharing the economic burden can open many doors
When the PTI government took charge in 2018, many Pakistanis, in general, and the youth, in particular, had great expectations from the regime. Ignoring suggestions from certain quarters, the outgoing PML(N) government presented the 2018-19 budget.
The PTI government moved quickly to present its ‘mini-budget’ to show its vision. Many believed that the new budget would have a radically different focus concerning the long-standing economic problems of the common man. PTI supporters expected special treatment for the poor and oppressed whose needs they said were put on the back-burner by the two mainstream parties representing the ‘status quo’.
These people were disappointed to see that the first two budgets of the PTI government turned out to be routine, run-of-the-mill affair, with nothing “revolutionary” about them.
Come 2020, people had even higher expectations from the budget. People expected some relief measures to help them pass through the debilitating effects of the Covid-19 crisis as unscathed as possible. Ordinary people (and not-so-ordinary public sector employees) have once again been disappointed by the budget.
Among many factors that denied the government any space to design a reasonable relief budget, the Covid-19 stands out conspicuously. This year, too, they had to make the budget in the shadow of the IMF diktat.
The latest episode of Pakistan’s tryst with the IMF started in the middle of 2019. PTI entered the corridors of power after years of hurling accusations at the previous governments of indulging in corruption and emptying the national exchequer. It was shy initially of making a request to the IMF for funding because Imran Khan had been condemning the previous regimes for making Pakistan subservient to the dictates of the IMF.
The government tried instead to seek help from friendly countries like China, Saudi Arabia and Qatar. However, when the economic problems became too hard to handle, it turned to the IMF.
In July 2019, the IMF approved a 39-month extended arrangement under the Extended Fund Facility (EFF) for $6 billion. The Fund-supported programme also sought to coalesce additional support from multilateral and bilateral creditors in excess of $38 billion. The express purpose of the EFF-supported programme was to reduce Pakistan’s economic vulnerabilities and generate sustainable and balanced growth, focusing on a decisive fiscal consolidation to reduce public debt and build resilience.
When the arrangement was approved on July 3, 2019, $1 billion was immediately disbursed to Pakistan. The remaining amount had to be phased over 39 months, subject to four quarterly reviews and four semi-annual reviews.
The conditionalities at the heart of the IMF programme were a multi-year revenue mobilisation strategy to broaden the tax base and raise tax revenue. The provinces were also supposed to support the consolidation effort by following the best practices of public financial management. Under the agreement, Pakistan has to ensure a flexible market-determined exchange rate and put in place a tight monetary policy to correct fiscal imbalances, rebuild reserves and keep inflation low. Other mandated policy measures included redress of structural weaknesses in the energy sector and improvement in the governance of state enterprises.
Responding to Pakistan’s request in the wake of monumental economic challenges posed by Covid-19, the IMF approved a $1.4 billion emergency loan through its Rapid Financing Instrument (RFI). An expected $1.5 billion relief in the shape of delayed repayment of loans to bilateral creditors is in the offing.
It may be noted that the $1.4 billion RFI is not part of the ongoing IMF programme. The IMF has also cancelled the approval of the second review of the programme scheduled on April 10. The Paris Club of creditor nations has also suspended the debt service payments from Pakistan as part of the G20 debt relief deal. Despite all this, Pakistan has $12.73 billion of external debt repayment obligations in the fiscal year 2020-21.
It is not the power or the pelf but the ideals, representing the muted majority across race and geography. The only context that such ideals may have is the ‘class’. It is extremely important for Pakistani literati to think along these lines.
People’s expectations from the budget 2020-21 need to be assessed against the backdrop of the havoc wreaked by coronavirus as well as its economic vulnerability predating the Covid-19 pandemic.
The federal budget 2020-21 suffers from serious contradictions. The tax collection target is Rs 4.96 trillion, which is 27 percent higher than the Rs 3.91 trillion in the previous year. This projection is based among other factors on the projection that the economy would grow at 2.1 percent, and inflation would remain stable at 6.5 percent.
Collecting this amount appears to be an uphill task for a variety of reasons. First, the performance in the previous year is a stark reminder that only three months into the pandemic could land the economy in negative growth territory. How the national accounts committee released contradictory figures about the actual growth rate casts a spell of uncertainty on the veracity of the reported figures.
What if, God forbid, coronavirus continues to haunt Pakistan throughout the next fiscal year. According to the best guess, it would require a miracle to restrict the level of negative growth to the previous year. The economy is being pummeled by lockdowns, a sharp decrease in the consumer demand caused by unprecedented levels of unemployment, and decreased foreign demand for the exports.
The government expenditure is increasing, partly because of a weaker national currency and partly because of an urgent need to keep the fledgling health sector afloat. A sizable social spending devoted to vulnerable economic groups under the Ehsaas programme is required. The fiscal deficit may thus reach double digits.
A high fiscal deficit would put Pakistan in a more vicious debt trap. In the current budget, debt servicing is Rs 2.7 trillion against a net federal revenue of Rs 3.7 trillion (after taking out the share of the provinces). The defence expenditure is Rs 1.66 trillion.
As regards the running of the civilian government, it would cost the national exchequer Rs 476 billion. The pension bill, including the civilian and defence components, is Rs 470 billion.
Given the large expenditures, the government has absolutely no way to undertake substantial relief for the sections of society which are most vulnerable to the Covid-19 onslaught. The good news is that the government has doubled the health expenditure from Rs 12 billion in the previous year to Rs 25 billion in the current fiscal year. The sad part is that despite an unprecedented strain on the public health system, the expenditure on health is just 0.4 percent of the budget expenditure.
The unenviable position of the government begs another question. What could have been done given the hard times? Following the Covid 19 crisis, most governments have tried to cushion the impact of Covid-19 by providing stimulus packages.
The relief packages at the global level has reached $8 trillion. The PTI government has injected substantial cash into its Ehsaas Emergency Cash Programme. Around 12 million vulnerable families were given a lump sum amount of Rs 12,000 to hedge against hunger.
Given the resource limits, Pakistan may have to explore some unique ways to restructure the economy. This could include the adoption of new technologies, focus on innovation, and empowering the country’s citizens by boosting their skills.
Documenting the economy is an important area. In the past, several efforts have been made to document the economy without much success. However, efforts to digitise the economy might face least resistance in these extraordinary times because of the general concern that currency notes are a potential source of Covid-19 infection.
Substantially cutting the policy rates is a time-tested tool for an economic turnaround. The State Bank of Pakistan has brought down the policy rate from 13.25 percent to 8 percent. It may be noted that the reduction in the policy rate in other countries of the region has been higher.
The current policy rate in Malaysia and Indonesia is 4.50 percent, in India 4.40 percent, in China 3.85 percent, in South Korea and Thailand 0.75 percent, in Japan -0.10 percent, and in USA and Euro Zone zero percent. Business leaders in Pakistan believe that bringing the policy rate down to 5 percent is imperative to revive business activities.
Pakistan is undeniably in one of the most challenging phases of its life. While elaborate figures will not fill an empty stomach, equitably sharing the economic burden can open many doors.