Pakistan needs an innovative fiscal policy

The latest World Economic Outlook by the IMF paints a bleak picture, bleaker than the one in April. The more we learn, as data pours in, the more we realize two things - how deep the recession and scarring is & secondly, how important timely collection and use of data is to achieve policy goals.

The WEO predicts a slower, and sluggish economic recovery. The optimistic forecast of ‘V-shaped’ recovery has been replaced by a more plausible hockey-stick shaped recovery -- if a second wave of the Covid-19 does not hit the world. The WEO calls for support of poorer economies by richer ones and a change in focus to improving health systems globally. Quite apart from the usual rhetoric, the Outlook brings to light the one big positive that the pandemic has brought - the unprecedented drop in GHG emissions. But that is a topic for another day, in the not so distant future.

Let’s look at the picture WEO paints for LIDC and see what that means for Pakistan.

LIDC are expected to contract between 1.4 and 2.2 percent. Globally, inflation is expected to be muted. Unfortunately, that will not be the case for Pakistan. Simply because we rely on imported inputs for most of our essential industries, and the Pakistani rupee has been taking a beating recently in the past couple of weeks. So via exchange rate, inflation will raise its head and then feed off of the usual suspects.

The World Bank and LIDC both, rightly, expect an increase in poverty. This will be the first time since 1998 that poverty is set to increase globally.

Yet, when it comes to actually reducing poverty in LIDC, the IMF’s policies start becoming counterintuitive. According to the WEO itself, in advanced economies, the fiscal deficits will go up to sixteen and a half percent of GDP. As opposed to that for LIDC, the fiscal deficits are expected to be just six percent of GDP. The difference between the GDP of the two categories is that of factors. So imagine a world where a set of countries with a better institutional set up, better (yet challenged) health system, a more productive labor force and a more innovative economy run a deficit to battle the pandemic. On the other hand is a larger set of countries with a bigger population but everything else (mostly) is the converse of the prior. And these countries are only devoting six percent of their already smaller GDPs to battle the pandemic and save their economies. What will follow is more acute global inequality, a poorer global south and a failed world that will have not learned its lesson.

So when I recommend running a larger deficit to give an actual fiscal stimulus to the Pakistani economy, I am not suggesting something unreal, theoretical and unattainable -- I am encouraging the Pakistani government to take the one actual policy route that will work; create much needed fiscal space where there isn’t any.

In the recent budget, the GoP announced a budget deficit of seven percent. Let us put aside how unrealistic it will be given the revenue targets, the government needs to be bold at this time.

There are numerous moments in this country’s history that wreak of missed opportunities. But this nation of the resilient has somehow, miraculously, and through short-termed policies managed to turn things around. I do not think that this is one of those moments.

This is a question of mere survival. With an aggressive neighbor breathing down Pakistan’s neck, Pakistan needs an economy that has resilience. This pandemic is taking its toll and is its sweet time. If the country does not resort to an innovative fiscal policy, it is directly jeopardizing its foreign policy - deterrence or no deterrence.

The deficit should continue the cash transfer program and widen the reach. It needs to cover the poorest of the poor but also the poor and the not so poor - quintiles one through three. These quintiles have the highest marginal propensity to consume in an economy. There is no sustained FDI forecasted, so let us try and keep ourselves afloat by strengthening consumption in our Aggregate Demand. An increase in consumption, coupled with lower policy rates by the SBP will help increase the rate of investment in Pakistan. And then the tax cuts might actually help. This could help put the country on a virtuous cycle.

What this means is, do what the IMF preaches in the latest WEO not what they tell you while making the budget.