Just as the Finance Minister said in his speech that it is not easy to quantify the impact of Covid, he economic numbers for the next fiscal year are subject to change. Even the numbers for the outgoing year are not clear as the impact of lockdown at home and supply chain disruption in the globe is hard to predict.
The real issue is bringing the economy back on the stabilization path and reviving growth. The ongoing year is unique and the impact could be lasting. The world has changed and Pakistan has to reposition itself. The consumption and behavior patterns are all set to be altered and the policymaking is required to be dynamic to quickly adjust to new realities.
The country was coming out of a balance of payment crisis. There was a stabilization path. But the BoP issued resurfaced with Covid. Earlier, the headache was to control current account deficit and now the challenge is rolling over or replacing the financial and capital account vulnerabilities. Market based foreign flows are drying and there is over reliance on the multilateral. This will further compromise the independent policymaking space.
The fiscal headache is worsening. In FY19, the debt servicing alone surpassed the net fiscal revenues. This year, due to one-offs, non-tax revenues are better than the target. Hence, despite growing debt servicing, the situation was better in the 9MFY20. There was primary surplus and now the last quarter primary deficit could be around 2 percent of GDP.
The latest revision of FBR revenues at Rs3.9 trillion this year is hard to achieve. Next year target of Rs4.95 trillion is as elusive as this year’s budgeted target of Rs5.5 trillion was. The target could be rolled back to Rs4.5 trillion in a few months which would still be an uphill task. The good thing about tax revenues is that the structure of tax collection is rightly shifting towards domestic taxes. This budget, the focus should be doing away with low yielding cumbersome taxes. That said, enhancing the tax base remains a challenge.
Inflation was a big concern last year; but now is a secondary variable in decision making. It is coming down and likely to remain subdued in FY21. The global commodity prices are likely to remain low and so will the inflation in Pakistan. The domestic demand driven pressures are not present due to changing consumption behavior. Having said that, monetization of domestic fiscal debt could create a problem.
A rare silver lining is the change in structure of savings and investment. The savings investment gap has thinned. The national savings as percentage of GDP increased from 10.8 percent in FY19 to 13.9 percent in FY20. The foreign savings are down from 4.5 percent to 1.5 percent. Total investment shrunk from 14 percent to 13.8 percent. There was some shrinkage in private consumption; but was partially offset by the increase in government consumption.
The problem is Pakistan is high consumption. Higher rates and other stabilization measures controlled the private consumption; but there is no respite to government’s consumption. With Covid, government consumption is ought to increase further. Without controlling government consumption, it will remain hard to fix the problem. That is why freezing of government expenditure cannot be overemphasized.