ARTICLE: This is the second of a two part series of articles highlighting some random thoughts on the Covid-19 relief package and its implications on the budget 2020-21.
GDP growth is widely acknowledged as a major contributor to budget deficits. Low growth rate implies lower tax collections, which in the event of no curtailment in expenditure, may compel the government to borrow more while a high growth rate would increase revenue and thereby reduce dependence on borrowing.
Thus, for the IMF to scale down Pakistan's growth rate for the ongoing fiscal year to negative 1.5 percent (from the earlier 2.4 percent) implies that the revenue target has to be downsized and with the raise in expenditure due to the pandemic the budget deficit would be higher than was budgeted and agreed with the Fund staff; however exactly how much higher would depend on the duration of the pandemic, the toll it takes on economic activity and the resilience of the economy to pick up quickly once the pandemic is over - elements that cannot be predicted with certainty though the government has come up with a ballpark figure of 3 million job losses due to the pandemic (and one would assume the 50,000 plus job losses due to the government's contractionary fiscal and monetary policies pre-Covid19 have been added to this estimate). Thus to quantify performance of key macro-economic indicators for the current year and set targets for next fiscal year is going to be even more challenging due to the pandemic that continues to rage in Pakistan than is usual due to data manipulation by Pakistan's economic team leaders.
The IMF resident representative maintains that the additionality in terms of expenditure due to the Covid-19 relief package is 519 billion rupees with the rest of the 1.2 trillion rupees funded from reallocating budget funds from other less urgent uses and from savings that appear during the year (this probably includes the 115 billion rupee contingency fund budgeted for the year). The IMF disbursed an additional 1.4 billion dollars under the rapid financing instrument (RFI) while the World Bank and the Asian Development Bank have pledged an additional 500 million dollars. Thus the total amount borrowed from multilaterals, nearly 2 billion dollars (at 163 rupees to the dollar the amount in rupees is around 326 billion rupees) is around 193 billion rupees more than was budgeted.
The Fund's projections are veering towards the optimistic. An example is its projected lower revenue collections of 4.6 trillion rupees for 2019-20 in the RFI documents uploaded on its website however the government backed by the Federal Board of Revenue is claiming no more than 3.9 trillion rupees to be collected as tax for the ongoing year - a sizeable difference of 700 billion rupees. Another example is the budget deficit rise of 2 percent from what was projected at the start of the programme (7.2 percent) but only 0.3 percent from what was actually achieved during 2018-19 (8.9 percent). Or in other words, the IMF reckons that the country is on course to quickly revert back to its programme conditions as and when the pandemic is deemed to be over.
One would have to wait for the budget 2020-21 to make a more informed analysis and that may well require ferreting out where Dr Hafeez Sheikh chooses to hide which allocation. Last year, for example, analysts were stumped as BISP allocation was noted in development expenditure outside PSDP for 2018-19 but the column for the current year was left empty while allocation for Ehsaas (which subsumed BISP) was noted in grants to others under current expenditure.
Pakistan's heavy reliance on foreign borrowing to pay for the budget deficit (and meet the foreign exchange requirements with respect to the current account deficit prior to the pandemic) was projected at 38.6 billion dollars for the 39-month IMF programme duration. An additional 2 billion dollars was estimated by the IMF post-Covid-19. These figures are very disturbing and one can only hope that the Khan administration puts the brakes on expenditure rise given that in the first year of the programme the budgeted development and current expenditure rose by 40 and 30 percent, respectively.
The Prime Minister has repeatedly cited the 1.2 trillion rupee Corona relief package as exemplary in the country's history, given our severe resource constraints. Pakistan is, like other countries of the world, facing a pandemic of mammoth proportions, with many comparing its impact to the Great Depression that rendered hundreds of thousands homeless and without jobs. The Roosevelt administration came up with New Deal policies reflecting out of the box measures to deal with the crisis after consultations with business leaders and economists; but sadly the Khan administration's response has drawn little from the US out-of-the-box thinking at the time.
The New Deal policies (effective between 1933 till 1939) focused on the three Rs - relief for the unemployed and the poor (direct injections through social security payments after the passage of the Social Security Act 1935), recovery of the economy through projects including the housing sector by setting up two new agencies notably the Home Owners Loan Corporation which simplified the mortgage system and Federal Housing Administration that established the standards for home construction, and financial sector reforms that included setting up the Securities and Exchange Commission and the Federal Deposit Insurance Corporation that indirectly benefited farmers. The US budget deficit was 0.7 percent of GDP in 1929, rose to 4.5 percent of GDP in 1932 and then to 26.8 percent in 1943 (World War II). By 2019 it was estimated at 4.6 percent, the rise attributed to government shutdown.
More recently due to the pandemic (with a massive curtailment in aggregate demand coupled with closure of productive units due to the lockdown) the US and other countries launched a stimulus package. The Congressional Budget Office has projected a budget deficit of 3.7 trillion dollars by the end of the year (US fiscal year ends September) the largest since World War II with the economy shrinking by 5.6 percent. However, the May 2020 employment data reveals that the economy gained 2.5 million jobs as restaurants, construction and some other sectors were opened in several states mid-May.
The US is neither constrained by liquidity issues (its stimulus package was in excess of 2 trillion dollars) nor by being on an IMF programme like Pakistan - points constantly raised by Pakistan's Prime Minister. Nonetheless one can make three observations on the 1.2 trillion rupee stimulus package. First, direct cash payments to the poor and the vulnerable (maybe for altruistic reasons as far as the Prime Minister is concerned but which nonetheless would fuel demand to jump-start productivity) is not a new concept as Benazir Income Support Programme was launched in 2008. What is innovative is the Prime Minister's decision to provide cash support to the daily wage earners but as they are largely unregistered this component of the relief package, however exemplary, has hit many snags. However, with growth at negative 1.5 percent prices would rise due to these injections initially with the IMF projecting 11.3 percent raise during the current year.
Second, Covid-19 has exacerbated the shrinking of aggregate demand in Pakistan in spite of a decline in the discount rate to 8 percent (still higher than core inflation estimated at 6.4 percent in April with CPI at 8.5 percent though with the lockdown it is unclear how accurate these figures are) and inter-bank rupee dollar parity of 163.3 for bid and 164.5 on offer (due to what many believe is market intervention by the SBP contrary to the commitment made with the IMF).
Recent reports suggest that the IMF staff is insisting on curtailing expenditure which must be fully supported for two reasons: (i) contraction in private sector activity pre-Covid-19 (exacerbated post-Covid-19) had already taken a heavy toll on jobs with many sectors/subs-sectors slashing jobs as well as salaries by more than 15 percent so for public salaries to be reduced by one percent, as is reportedly being recommended by the IMF, is reasonable and would bring some semblance of equity; and (ii) last fiscal year current expenditure was raised by 30 percent and development by 40 percent - a raise that has implications for inflation and makes little sense when contractionary fiscal and monetary policies were being implemented as a means to check inflation.
And, finally, the government has unlike the US government during the Great Depression not taken the bull by the horns i.e. set up regulatory institutions designed to strengthen the mortgage market and instead has begun construction of low income housing without uploading the actual cost per unit and the component of borrowing costs from the builders, if any.
To conclude, the Finance Ministry is engaged in almost runaway expenditure through borrowing while being unable to raise revenue through widening the tax net thereby putting more pressure on the productive sectors and the salaried which will raise the budget deficit to double digits. One would sincerely hope that appropriate measures to slash expenditure are taken in this year's budget and while reportedly the Prime Minister has asked for a further cut in cabinet and ministries expenditure yet while this provides good optics to the people yet in actual terms makes little if any difference to total budgeted expenditure.
Comments
Comments are closed.