Unpopular projections

In the wake of the deadly COVID-19 pandemic, the differences, between macroeconomic and fiscal projections made by Ministry of Finance (MoF) and State Bank of Pakistan (SBP), have further widened, as the latter is preferentially towing International Monetary Fund’s (IMF) line to align itself with the lender of last resort.

Advisor to Prime Minister on Finance and Revenues, Dr Abdul Hafeez Shaikh, last week convened a crucial virtual meeting to deliberate upon the macroeconomic projections for the current fiscal year because the central bank had set all its projections completely in line with the IMF. It was as the fund released its staff report after approval of $1.38 billion under Rapid Finance Instrument (RFI) and brought down real GDP (gross domestic product) growth target to negative 1.5 percent for ongoing financial year.

Keeping in view the numbers of last two to three decades, there have always been differences in the projections of the MoF, the SBP, and the IMF. The pattern revealed the IMF would always come up with highly conservative projections, the SBP mostly kept its forecasts close to reality; however, the MoF invariably tried to sell rosy estimates. But now the SBP had completely aligned itself with IMF and there was no difference in their projections on macroeconomic front.

The MoF and Planning Commission disagree with the projection that the GDP growth might plunge to negative 1.5 percent for the current fiscal year.

During the official meeting, Dr Sheikh objected to the projection of negative growth, arguing that Pakistan’s different sectors had performed in the first three quarters and there might be negative impact in the fourth quarter, but the overall growth would remain positive.

Pakistani authorities are trying to find out possibilities to create an opportunity out of this lingering crisis as the MoF was working out modalities for applying for G20 debt relief this week. The template on which the debt relief will be sought will be forwarded to G20 countries for applying this relief. When contacted, Federal Secretary Finance Naveed Kamran Baloch, said, “The details are being worked out and will apply it (debt relief) this week”.

To another question about macroeconomic projections, Baloch said it would be premature to say anything on definite terms before all the data on different sectors of the economy was available.

However, top officials of MoF and Planning Commission were unanimous the real GDP growth would be hovering around 1 to 2 percent of GDP because this range would determine the growth figure mainly on the production figure reported by the crop reporting system of provinces. Against the envisaged production target of wheat at 27 million tons for the current fiscal, the output may fall by 1 million tons to 1.5 million tons because of recent rains in different parts of Punjab that might result into falling of overall GDP growth in the range of 0.3 to 0.4 percent. So, the growth might be hovering around positive 1.5 percent in the current fiscal year.

The central bank has projected recently the GDP growth would shrink and might be standing at negative 1.5 percent for the current fiscal year. It has brought down its GDP growth projection completely in line with the IMF’s latest assessment.

The SBP stated that latest monthly figures for March 2020 pointed to noticeable slowdown in domestic economic activity as cement dispatches declined by -14.3 percent, auto sales -69.6 percent, POL sales -31.4 percent, highly value-added textile exports -15.3 percent, IVA exports of textile -32.5 percent, and food exports -25.7 percent in March 2020.

The SBP has forecast the GDP growth would be positive 2 percent in next fiscal 2020-21 as outlined by the IMF staff in its latest report. “The growth is expected to gradually recover, while inflation is expected to remain moderate in the current fiscal year,” the SBP high-ups showed in their graphs.

In response to falling inflation and inflationary pressures, the SBP officials stated, “The monetary policy has been prudently loosened”. In a month’s period, the SBP’s monetary policy committee had brought down the discount rate by 4.25 percent from 13.25 percent to 9 percent.

The SBP officials stated the inflation had fallen 450 basis points since January 2020 on the back of easing food and energy prices and further reduction was expected based on Sensitive Price Index (SPI).

On other hand, the sub-committee, comprising all ministries/divisions under Deputy Chairman Planning Commission (DCPC) Mohammad Jehanzeb Khan, assessed the GDP growth would reduce by 1.3 percent, the population below poverty line would 10 percent, and 3 million people would lose jobs in post COVID-19 scenario.

This official report on economic losses stated that “Assuming that no economic activity takes place in Pakistan and there is a complete lockdown, it would take 1.66 weeks for Pakistan’s growth to drop to nil (zero)”.

The report states that poverty is measured in Pakistan through household consumption expenditure on food and non-food items. Simulations conducted show that if annualised aggregate consumption of households goes down by 5 percent in scenario-1, poverty headcount will rise from existing 24.3 percent to 29 percent and in case of 10 percent reduction in household consumption poverty could rise to 33.5 percent.

Consumption is the smoother function and it hardly responds to short-term fluctuation of one quarter. In this case assumption of 5 percent decrease in consumption is harsh but even in this case around 10 million people will fall below the poverty line. During pandemic and post-crisis periods, short-term income losses will be offset by unprecedented rise in social safety nets. The government has extended outreach of its cash transfers to 12 million households from existing 5 million. It means the government has extended its support to 78 million people which is more than 32 percent of population. This will be the largest cash transfer in this region in terms of coverage.

Of the total workforce of 61.7 million in Pakistan, 27.3 million informal sector workers are most at risk of losing their jobs due to the prevailing lockdown situation across the country. These informal workers are mainly engaged in sectors most likely to be adversely impacted due to shut down of economic activity. The distribution of Pakistan’s 27.3 million informal sector workers by sector shows that 8.88 million work in the wholesale and retail trade sector, 6.22 million in the manufacturing sector, 4.43 million in construction, 4.37 million in community/social & personal services sectors, and 3.14 million are engaged in the transport/ storage & communication sector.

The writer is a staff member