Pakistan’s coronavirus-stricken budget calls for rethinking economic paradigm
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This will be perhaps the first time in Pakistan’s history when citizens fully understand that budget FY21 estimates are mere indicative figures and bound to be revised sooner than most of us think. Any budget paints a sorry figure where interest payments, defense spending, and civil administration expenditures are on the rise while development budget for job creation, infrastructure and social uplift is on a decline.
Major slippages are expected as against the projections by Ministry of Finance. First, the low economic expansion envisaged during the next year will ensure that FBR’s tax targets are not met. Besides, the budget brings with it exemptions and tax relief for several conventional revenue spinners.
Second, as the COVID-19 timeline goes well in to the first and second quarter of the next fiscal year, the government may need to win favour by taking a U-turn on federal subsidies – currently projected to decline by 40 percent. It is unlikely that power sector subsidies could be done away with if the government is now aiming for a ‘smart’ and ‘selective’ lockdown strategy. Such subsidies may well be provided to mitigate pain and win the political favour of the private sector.
Third, alongside coronavirus, Pakistan’s economy is also confronted with a locust attack which has threatened the livelihoods of the farm sector. This makes it difficult to believe whether the government could actually reduce relief to agriculture by almost 75 percent as envisaged in the budget. The food subsidies and support to Utility Stores Corporation has also been slashed by 54 percent and 93 percent respectively, which will be a very hard act to follow once any food price inflation or shortages set in.
COVID-19, a locust attack, energy sector losses, haemorrhaging in public sector enterprises, rising domestic and external debt, and an unrealistic expectation that provincial budgets will provide surpluses, are all factors pointing towards a near collapse of the conventional macroeconomic framework.
Dr. Vaqar Ahmed
Fourth, the state also realizes that it may not be able to bear the burden of loss making public sector enterprises for long, hence we see the move to fire workers of Pakistan Steel Mills. Government of Sindh has vowed that it will prevent the federal government from actually implementing this decision as this was never discussed during the Council of Common Interests. In case this intent by Islamabad is foiled and FY21 also carries the losses of public sector enterprises and state-owned units, it may not be possible to achieve a 23 percent reduction in federal grants as projected in the budget.
COVID-19, a locust attack, energy sector losses, haemorrhaging in public sector enterprises, rising domestic and external debt, and an unrealistic expectation that provincial budgets will provide surpluses, are all factors pointing towards a near collapse of the conventional macroeconomic framework.
What are the government’s choices in FY21? To avoid a large shortfall in tax revenues, the government will need to move its focus from squeezing existing tax payers towards introducing reforms in tax administration and audit which could help all tax bodies across the country to correctly identify and reach the large non-compliant tax payers. Better federal and provincial coordination is the need of the hour to unearth instances of evasion and avoidance.
With the shrinking size of the development budget, a more coordinated planning and execution of Public Sector Development Programme (PSDP) and provincial Annual Development Programmes (ADPs) is desired. The federal and provincial finance secretaries now have a working committee that meets regularly to coordinate financial releases. This model is now required by the federal planning commission, and provincial planning and development departments. This could prevent the duplication of development schemes across the provinces and bring overall efficiency in spending and monitoring of projects.
To kickstart the process of economic growth, it may be difficult for businesses to attract large investments. The government can however help in reducing costs, particularly for micro and small enterprises. This may be done by rationalizing the regulatory costs faced at the federal, provincial, and local tiers. Pakistan Regulatory Modernisation Initiative (PRMI) will need to expedite its efforts to conduct a regulatory impact assessment – based on which the regulatory burden may be reduced.
The World Bank Group expects the global economy to contract by over 5 percent this year. Such a situation makes it very difficult for the government to expect a rise in non-debt inflows. It is in this context that out-of-the-box measures are required to help exports and remittances.
For the former, it is now essential that the government execute measures approved under the Strategic Trade Policy Framework on a war footing. This will help the exporters to pivot and repurpose in the face of COVID-19.
Finally, the pandemic will give rise to ‘big government’, expansion in public administration services and expenditures. Growing expenses are bound to test the government’s commitments under the IMF’s Extended Fund Facility and Public Finance Management Act 2019. The ceilings on borrowing may also be breached.
It is in this context that a business-as-usual debt management strategy will not work. The Ministry of Finance along with provincial finance departments will need to chalk out a very different approach to mitigating any possible default.
Dr. Vaqar Ahmed is an economist and former civil servant. He is author of ‘Pakistan’s Agenda for Economic Reforms’ published by the Oxford University Press. Twitter: @vaqarahmed