A blueprint for Pakistan’s budget
The economy which the Pakistan Tehreek e Insaf (PTI) government took over in 2018 had been subjected to horrendous mismanagement force-multiplied by rampant corruption. But by the end of the 2019, Pakistan’s economy seemed to be moving towards some stability. The trade deficit had dropped significantly, the fiscal deficit was largely contained, foreign exchange reserves situation was comfortable, the credit rating had improved from negative to stable and the country’s rank on the “Ease of Doing Business” Index had climbed 28 notches.
The trade deficit improved due to lower imports but at the expense of economic growth while fiscal consolidation was supplemented by a reduction in development expenditures rather than tax-revenue mobilization.
FDI inflows were also not substantial. In early 2020,the fear of the global pandemic soon became a local issue and the ensuing lockdowns all across the country combined with global depression, severely impacted the economy and resulted in a growth contraction for the first time since 1952.
While the Covid-19 pandemic has not yet reached its peak in Pakistan the economic fall-out is getting clearer by the day. As has been forecast, Pakistan’s economy has already taken and will still take more hits. The post-pandemic economy and finance will have to be re-arranged fundamentally. An alarming economic outlook for developing countries, particularly South Asia, has been forecast. It will be the worst economic performance of the last 40 years. With a second wave about to raise its ugly head and hospital beds becoming scarce, the forecasts could be dwarfed by the real extension of the economic crisis.
Already industrial production has come down to half and is not easily revived as the stalemate in the construction industry is showing. Remittances have come down by almost half because of the precarious situation abroad and the low oil prices. A recovery is not in sight. The service industry is suffering (apart from IT) and consumer attitudes are changing.
Despite the re-structuring of Pakistan’s debt, its debt service will still be considerable hobbling investments into the revival of our economy. Poverty is sure to grow even more. Many jobs will be lost when existing industrial units like Pakistan Steel Mills (PSM) or Pakistan International Airlines (PIA)are streamlined to cut losses that burden the exchequer. The pandemic lockdowns have hit agricultural production and there is a fear of food shortages and rising prices for food stuff creating hunger among the poor.
The current budget of the PTI government is trying to square this circle by not putting any new taxes but enhancing the Ehsaas program meant to give relief to the poor. More radical measures are needed to stem the tide. Whatever little money is available for investment has to be used to repair broken supply lines and import substitution. Import of luxury goods should be forbidden including the import of all kinds of cars so as to promote our own car industry. And importantly, expenditures have to be cut down at all levels in all state institutions including the military.
While security is a must, one can cut expenditure using less fuel or government cars, cutting electricity bills and the like. Much can be achieved by reorganizing and streamlining organizational structures, cutting down on bureaucratic measures, computerizing administration, and rationalizing procedures. The message has to be delivered to the public via the media that a state can only distribute what it is earning. The practice of previous years to take loans for consumption has to stop.
With all key economic targets being missed in Financial Year 2020, the outlook for 2021 is bleak. With Pakistan’s debt burden already significant, similar to a number of developing countries it has become almost impossible to service the huge debt. The government will have to further approach the IMF, World Bank and ADB for relaxation in debt service. US$ 1.4 billion has already come under the “Rapid Financing Instrument”. The Pakistan Institute of Development Economics (PIDE) and the World Bank have both estimated a massive increase in Pakistan’s poverty rate due to the economic recession. The brunt of this recession will be borne by the daily wagers employed in the informal sector.
The Federal & Provincial governments have taken multiple steps to balance life against livelihood to contain the impact of the Covid-19 pandemic medically and economically.ARs1.2 trillion fiscal relief package was initiated to create a balance between direct assistance to the vulnerable and protecting industries and businesses.
The Government’s response is, unfortunately, been hindered by the social, political and cultural dynamics of the country. The construction sector package is expected to activate over 70 construction &allied industries which are expected to attract both domestic & foreign investors. The continuity of CPEC is of great significance, because these infrastructure projects, as well as special economic zones and industrial parks, are closely related to the future development of Pakistan.
Because of the pandemic, the IMF has predicted a positive growth of only 2% in Financial Year 2021for Pakistan, even this seems too optimistic at this stage. Inflation is expected to remain low given the lower demand and falling global commodity prices. State Bank of Pakistan policy rate is expected to be reduced further given the lower inflation combined with the need to jump start the economy. The Pakistan Rupee is expected to depreciate further against the US Dollar. However, the extent of such depreciation depends primarily on the debt restructuring initiatives.
Remittances are expected to be lower due to the negative impact of Pakistani workers losing their jobs in the Middle East both due to the pandemic as well as declining oil prices. Exports are expected to be significantly impacted adversely in the coming fiscal year since Pakistan’s major export destinations, China, UK, US, France, Italy, Spain and Germany, are among the countries most affected by the COVID-19 pandemic.
Imports are expected to remain suppressed due to lower economic activity and reduced oil prices. Compliance with FATF conditionalities continues to be a critical factor and while the government is confident of making all efforts to achieve maximum possible compliance ahead of the assessment in September 2020.
The main features of the Federal budget reflects well thought-out ideas, the overall approach is to strike a balance between corona expenditure and fiscal deficit, keeping the primary balance at a sustainable level while protecting social spending under the “Ehsaas Program” to support vulnerable segments of society.
Other features are resource mobilization without unnecessary changes in the tax structure, successful continuation of the IMF program, carrying forward the stimulus package, and keeping the development budget at an adequate level to stimulate economic growth. Defense and the internal security of the country have been given due importance.
On its part, other than the tremendous Refinance (Rozgar) Scheme, the State Bank of Pakistan (SBP) under the refreshingly dynamic leadership of the Dr Raza Baqir has taken measures across the board to stabilize the economy by keeping the banks safe and sound. It has also set out a digital-focused, national payment systems strategy designed to boost “financial inclusion”, particularity for women and the poor. Only 21% of adults have a transaction account today and of these only 7% are women. Cash still dominates Pakistan's economy, with most wages paid in paper money. Merchants are largely unable to accept digital payments. Our economy needs a strong impetus for digital payment and financial inclusion would make the access of people to financial services like bill payment and loans easier thus boosting business and creating new jobs.
There is a need to increase the number of digital access points for making easy payments and the SBP plans to install an additional one million digital access points over the next three years. The boost of transparent cashless digital transactions is also expected to instill greater confidence in international investors to do business in and with Pakistan. The service wishes to empower customers, allowing them to make payments or purchases, virtually from wherever they want, without having to worry about the medium.
The three TELCO banks have had a monopoly over the financial transactions of their TELCO customers till now, with the Asaan Mobile Account (AMA) “financial inclusion” scheme pushed by the World Bank (WB). 80% of the unbanked in Pakistan have a hope of having bank accounts and access to financial services denied to them. Will regulators SBP/PTA be able to push through this scheme or will the poor in Pakistan be held hostage to perennial poverty?
Institutional reforms are being undertaken across the board with the aim of optimizing economic resources in order to yield better social and economic results. E-commerce is being encouraged to be at the forefront of all business initiatives thereby fueling digital transformation and leveraging the significant pool of IT workforce.
The eco-system for startups is being improved by fiscal and regulatory reforms in order to attract talent and investment. The Board Of Investment is being completely revamped to become a one-window facility for investors during the entire life cycle of their investments.
Comprehensive reforms must be undertaken in the agriculture sector covering selection of cash crops, enhancing yield, developing commodity markets and developing food grain silos. An integrated SME Development Framework, which clearly lays down roles and responsibilities of institutions to support SME development in a holistic manner, needs to be developed and implemented.
The manufacturing sector is being prioritized for providing a comprehensive package of incentives to achieve substantial growth which will help in substituting imports and/or increasing exports and will also provide large scale employment opportunities. Special focus is being given to improve technical & vocational education and training facilities. Privatization of state-owned entities which are bleeding the state resources year on year is being prioritized. After the closure of Pakistan Steel Mills (PSM), the employees are being laid off after being paid for doing nothing for seven years. PIA should be similarly closed and employees paid off as is being done in PSM.
Public Private Partnerships are being pursued selectively & smartly with special focus on social infrastructure particularly in healthcare, education & technology.
The only way forward for the budget is to take bold and innovative steps but with calculated risks. For this all credit has to go to Dr Hafeez Shaikh, the Advisor to the Prim Minister on Finance, the Federal Secretary Naveed Kamran Baloch and the entire team who contributed to this massive exercise.
(This is the first article in a series. The writer is a defense and security analyst).