2.1 percent growth target: Global situation, domestic recovery enlisted downward risks

ISLAMABAD: The government has enlisted two uncertainties including worsening global economic situation and prolonged recovery in domestic markets as downward risks to the 2.1 percent growth target for the next financial year 2020-21.

The government on Friday released 'Fiscal Risk Statement' with the budget documents for 2020-21, which is prepared to comply with Section 4, Sub-Section 3 (b) of Public Finance Management Act, 2019, stating that annual budget statement will also contain statement of fiscal risks.

It stated that Coronavirus has had profound impact on Pakistan's economy. For the first time in many decades, Pakistan's economy has entered into recession as GDP contracted by - 0.4 percent in 2019-20. As per the current estimates, economic growth is projected at 2.1 percent in 2020-21. However, there are downward risks to target growth emanating from two uncertainties; (i) worsening global economic situation, and (ii) prolonged recovery in domestic markets. If these risks materialise, then tax revenue collection target is likely to be impacted. These risks are categorized as short-term risks predominantly affecting 2020-21 forecasts.

It further stated that the government has taken a number of steps to reduce energy sector losses, including increase in prices of energy for high-end consumers, improved management, and resolution of circular debt, there are high off budget arrears and liabilities. There are two main risks emanating from; (i) non-reduction of flow of energy sector losses, and (ii) non-payment of arrears and liabilities. Both of these risks may impact government's fiscal position if such arrears and liabilities are required to be paid through the budget.

The government provides guarantees, grants, loans and at times equity investments to Public Sector Enterprises. Guarantees are categorized as contingent liabilities; however, the grants, loans and equity investments directly impact the budget as they increase the government's expenditure. While the government intends to structurally reform PSEs there is a risk that such reforms take more time than envisaged which will negatively impact government finances. To mitigate these risks, the government is committed to develop a new State Owned Enterprise Law in the latter half of 2020 that will provide a stronger governance and performance management framework.

The government also intends to adopt a clear policy for establishing PSEs in future, deciding whether to sell, liquidate or retain the existing PSEs. The policy will decide as to which of the PSEs will be retained or established in future or will be run on a self-sustainable basis. The policy will also lay down principles regarding giving subsidies to the SOEs on an ongoing basis.

Since 2005, damages and losses resulting from natural disasters in Pakistan have exceeded USD 18 billion. Government has established disaster management functions in shape of disaster management authorities, created a fund (called National Disaster and Risk Management Fund) and formulated various policies, strategies and plans (e.g. National Disaster Management Plan 2013-2022). In addition, the government has also allocated on-budget natural disaster and contingency reserve to deal with natural disasters in 2020-21 budget. However, there is a risk that natural disaster will have negative impact on the medium-term fiscal position.

The need to project/expect large provincial budget surpluses in future points to a broader problem with the fiscal landscape of the country. With the provinces taking a substantial share of national revenues, and federal government being liable for almost the entire national debt, the structural fiscal balance has become lopsided. The situation is unsustainable unless an appropriate adjustment occurs in the structural fiscal balances of federal and provincial governments. The government has formed 10th National Finance Commission with the view to deliberate on options leading to fiscal harmonization.

In order to mitigate these risks, continued monitoring and implementation of structural reforms agenda will be pursued. Reduction of fiscal deficit to make Pakistan's debts more sustainable and identification of fiscal space for priority human and infrastructure development will remain the key principles based on which medium-term fiscal policy will be based.