The preparations for the budget for fiscal year 2020-21 began late last year, as is the norm, with ministries/departments projecting their current and development expenditure needs for next year, traditionally overstated to ensure their actual needs are approved by the Ministry of Finance operating under severe resource constraints; and as the country is on one of the most exigent International Monetary Fund (IMF) programme's compared to the previous 23 programmes the budget's design was no doubt in conformity with the quantitative time-bound targets and structural benchmarks agreed. The seismic earthquake that the global economy, including Pakistan, is currently grappling with today as a result of the Coronavirus, is compelling the Pakistani authorities (through a pledged significant package of relief for the productive sectors as well as the general public scheduled to be announced as these lines are being written) and the IMF (which has, as per Hafeez Sheikh the Advisor to the Prime Minister on Finance indicated that the budget deficit would not take account of disbursements dealing with the Coronavirus) to make some major adjustments in the budget.
At present, there is considerable uncertainty as to what is likely to be agreed between the Pakistani authorities and the IMF team for two reasons. Firstly, the report of the second mandatory review detailing the actual staff-level agreement dated 27 February 2020 that, in turn, would provide the basis for renegotiations has not yet been uploaded on the Fund website; and secondly and more relevantly, it is unclear what expenses would be defined as dealing with the Coronavirus and therefore, like the circular energy debt, be exempt from being a component of the budget deficit.
State Bank of Pakistan (SBP) has announced the following measures: (i) a reduction in the discount rate by 75 basis points though this decision was premised on the SBP claim that "the current market volatility being experienced in Pakistan is externally driven and the strengthening in the fundamentals of Pakistan's economy that drove the improvement in Pakistan markets before the Coronavirus outbreak remains intact." However, SBP pledges that it "stands ready to take whatever additional actions that may be necessary to safeguard price and financial stability and support economic growth;" (ii) Temporary Economic Refinance Facility (total size 100 billion rupees with maximum loan of 5 billion rupees); and (iii) Refinance Facility for Combating COVID-19 (3 percent to purchase of equipment to detect, contain and treat the Coronavirus).
Dr Hafeez Sheikh in the presence of the Prime Minister, during an interaction with the media in the Prime Minister's office, revealed that a National Coordination Committee meeting has decided to formulate a joint strategy to deal with the Coronavirus, an approach that must be appreciated as it would provide holistic mitigating measures, and pledged: (i) provision of necessary medical equipment to deal with those infected; (ii) providing relief to affected industries, airlines, transport, small and medium enterprises, tourism through providing tax relief and raising subsidies; (iii) allocating 280 billion rupees to the farm sector though it is unclear whether this would be in the current or next fiscal year and whether it is part of the government's national agriculture policy announced last July envisaging a total outlay of 309 billion rupees (84 billion rupees earmarked for budget 2020-21); (iv) increased spending on Public Sector Development Programme targeted to provide jobs and again it is unclear whether this increase would be for next year rather than the current year; (v) 190 billion rupees disbursements under Ehsaas programme (with its largest component being Benazir Income Support Programme) would be expedited; and (vi) refunds of 10 billion rupees would be released forthwith.
The government is once again between a rock and a hard place - not enough domestic resources to sustain the productive sectors and ensure that the medical and essential commodity needs of a growing number of the vulnerable are met. The customary donors amongst the developed countries are suffering major blows to their economies due to the virus have a very limited capacity to assist Pakistan at this time, and multilaterals are focused on the global picture; while there has been a considerable rise in the expenditure needs to contain the negative impact of the virus on the economy. The apprehension is that unless a significant package is injected into the economy, the growth rate already projected at a low of 2.4 percent for the current year maybe less than one percent due to the virus. It is certain that the negotiating skills of the Pakistani economic team with the IMF will be sorely tested in times to come as would their ability to think out of the box.