Relief or revival?

The first and foremost challenge for the Pakistan Tehreek-e-Insaf (PTI) government’s economic managers is to present such a budget for next fiscal year 2020-21 that breathes new life into the dying International Monetary Fund (IMF) programme under $6 billion Extended Fund Facility (EFF).

It’s no more an easy task in the prevailing economic as well as political conditions in the wake of COVID-19 pandemic because Pakistan’s budget makers are in a catch-22 situation as they are supposed to kill two birds with one stone as on one side the political leadership wanted to present a relief-oriented budget in view of the pandemic, while the IMF is pressing it to adhere to the path of fiscal consolidation that can only be taken with the help of strict financial discipline.

So, first of all there is a need to dispel the impression that COVID-19 outbreak destroyed the path of prosperity. However, it is a fact that this virus multiplied difficulties for the struggling economy of Pakistan under the IMF programme.

Pakistan’s economy was struggling before COVID-19 pandemic phenomenn, mainly because of higher inflation and interest rates, negative LSM (large-scale manufacturing) growth, weaker exports, sluggish resource mobilisation, uncertainty surrounding hot money inflows and above all tough IMF loan-related conditionalities. High policy rate, exchange rate and taxation reforms have increased cost of doing business, hampering the industrial growth.

The GDP growth plummeted to negative and stood at negative 0.38 percent for outgoing fiscal year while inflation on average was expected to be around 9.1 percent for the outgoing fiscal year. The post COVID-19 estimates showed that the unemployment and poverty rose sharply in Pakistan.

Under the IMF programme, the doling out of relief-oriented packages becomes possible in case of any emergency such as disaster or this kind of pandemic, but there will be a limit to this kind of frame of mind as the IMF has allowed unprecedented hike in the budget deficit especially primary.

The government was supposed to bring down the budget and primary deficit significantly down, but after the outbreak of coronavirus the fund allowed hiking of budget deficit to 9.6 percent of GDP and primary deficit to 2.9 percent of GDP for end June 2020.

The IMF is now demanding two things: raising revenues and rationalising expenditures in order to bring back financial discipline back on the track. The IMF envisaged Federal Board of Revenue’s (FBR) tax collection target of Rs5103 billion and Pakistani authorities are making last ditch efforts to convince the fund team to slash it down to Rs4,700 billion. However, the IMF is unwilling for it but there are chances both sides might evolve consensus to set the FBR target at over Rs4,900.

The IMF also asked Pakistan to undertake massive fiscal adjustments to bring down primary deficit to negative 0.4 percent of GDP for the upcoming budget 2020-21 post COVID-19 pandemic. They proposed freezing all major non-development expenditures heads including salaries and defence in order to bring down primary deficit from projected negative 2.9 percent in outgoing fiscal year to -0.4 percent of GDP in the next budget for 2020-21.

The IMF programme that now seems to be stalling right now, could only be brought back on track provided the government demonstrated its ability to present and pass the budget that is aligned with the lender of the last resort’s envisaged macroeconomic framework.

Any major deviation from the path of ‘fiscal discipline’ could derail the programme by creating problems in the completion of second review and release of third tranche worth $450 million under the loan programme, halted after the outbreak of COVID-19, that changed the country’s economic realities drastically.

The IMF had already extended $1.4 billion under Rapid Fund Instrument (RFI) to support Pakistan in its battle against coronavirus.

Now Pakistan is seeking major relaxations in primary deficit/fiscal deficit targets to revive the programme and it will be an achievement of the government if it convinces the IMF for allowing hiking in the budget deficit as well as primary deficit for the next budget 2020-21. Pakistani authorities are hinting that they wanted to convince the IMF to bring down the primary deficit from 2.9 percent of GDP in outgoing fiscal to -1.2 percent of GDP for next budget. If the IMF insists upon bringing down the primary deficit of making massive adjustments of 2.5 percent for arriving at desired level of -0.4 percent GDP would make things difficult to deliver during the course of next fiscal year.

The IMF has also recommended Pakistani authorities to go for belt-tightening, while warning that it would be heading towards an ‘unsustainable’ debt trap if the primary deficit was not reduced to the desired level.

Pakistan’s total debt and liabilities have so far touched Rs42,820 billion, equivalent to 98.2 percent of GDP till end of third quarter (July-March) period of the current fiscal year so it’s heading towards 100 percent of GDP at supersonic speed.

The IMF is suggesting freezing of all major heads of non-developmental expenditures heads such as freezing of salaries under austerity drive. But Pakistani budget-makers are exploring possibilities for rationalisation of expenditure side as proposals were under consideration to continue ban on filling of 67,000 vacant posts at federal levels, purchase of physical assets such as vehicles and other goods, while abolishing of those posts that were lying vacant from last one year. Moreover, they are also mulling reversal of monetisation of cars from grade 20 to 22 officers, abolishing funding for vertical schemes for provinces such as health, education, population welfare and others that fall into domain of the provinces in the aftermath of 18th constitutional amendments and introducing targeted subsidies of power sector through Ehsas programme and many others.

The initial assessment done by Ministry of Finance that the ban on purchase and other austerity measures could save up to Rs50 billion and the targeted subsidy for power sector could reduce its demand to the tune of Rs50-70 billion in the next budget.

For next budget, the PTI-led regime envisages overall macroeconomic stability in view of fiscal consolidation, improving external account and revival in agriculture and industrial growth. The GDP growth for 2020-21 is targeted at 2.3 percent with contributions from agriculture (2.9 percent), industry (0.1 percent) and services (2.8 percent). The growth targets are subject to favourable weather conditions, post COVID-19 economic recovery, managing current account deficit, consistent economic policies and aligned monetary and fiscal policies.

Fiscal policy during 2020-21 envisages containing fiscal deficit, additional resource mobilisation, controlling current spending and switching to targeted subsidies, while prioritising development spending.

The balanced monetary policy is aimed at supporting adjustment process to restore macroeconomic stability and manage aggregate demand. However, the challenge would be to strike a balance between growth and stability in such a way that monetary policy tools do not suffocate economic growth, while containing inflationary pressure.

Average inflation during 2020-21 is projected at 6.5 percent on the basis of subdued demand and suppressed commodity prices in the international markets and second round effect of COVID-19 related economic implications.

Expectation of resurgence of global commodity demand in 2020-21 and revival of economic activity after the deadly pandemic is a positive signal for exporters. However, global demand will be lower than pre-COVID period and Pakistan’s exporters will be facing challenging domestic and external environment.

Import demand, despite fall in crude oil prices, is likely to increase marginally but exports pick-up will not be able to neutralize it. Resultantly, trade deficit is projected at 7.1 percent of GDP. Current account deficit is projected to be 1.6 percent of GDP in 2020-21 with projected growth of exports and imports of 1.5 percent and 1.1 percent, respectively.

Finally, the government will have to act together to fix the economy as the time of window- dressing is already over so undertaking of serious reforms can only steer the economy out of crisis mode.

The writer is a staff member