Preparation for budget 2020-21 has been ongoing for months and though, disturbingly, the medium-term budget strategy paper 2020 approved by the cabinet on 18 March failed to take account of the tremendous challenges facing the global economy in the backdrop of the raging pandemic with greater devastating implications on the economies of heavily indebted developing countries like Pakistan, yet the 1.2 trillion rupee incentive package (a misnomer?) announced subsequently by the Prime Minister end March no doubt was aimed at rectifying that shortcoming.
The strategy paper envisaged 3 percent growth rate with a budget deficit of 5.8 percent and an inflation rate of 8.4 percent, while pledging to maintain a tight fiscal policy over the medium term. The answer to the query as to whether the strategy paper's targets remotely reflect the capacity of the government to meet them as the Coronavirus rages in the country is a resounding no. The follow-up question begging an answer is what are the new requirements or indeed targets that must be set by the Ministry of Finance in an attempt to not only: (i) grapple with the tremendous projected shortfall in revenue estimated at around 1.5 trillion rupees from what was agreed with the International Monetary Fund (IMF) under the ongoing 39-month programme for the current year (due to large-scale lockdown that is compromising the capacity of even the private sector to meet its operational and fixed costs). Medical experts are generally agreed that the Coronavirus will continue to rage till at least the end of current fiscal, if not more, with a danger of a second wave of infections if the lockdown is lifted too soon or in other words the impact would continue for at least the first quarter of next fiscal year; (ii) an expenditure allocation for the current year that is expected to rise and go into the first quarter of next year as Pakistan's government, like other governments around the world, revises and upgrades its Coronavirus specific package - a raise on the back of additional external and domestic borrowing; and (iii) the expected rise in the budget deficit by at least 3 to 4 percentage points which would take the country into a highly unsustainable budget deficit of between 12 to 13 percent - a projection based on the actual deficit for last fiscal year later revised upward to 8.9 percent instead of the earlier optimistic 7.2 percent.
Pakistan's budget makers for 2020-21 face a twin challenge today. One posed by the fact that the economy was already in a tailspin due to tight monetary and fiscal policies agreed with the IMF by the economic team leaders in May last year, a fact which accounted for one of the lowest projected growth rates in the history of the country at 2.4 percent. Incidentally, this rate is now being projected at less than one percentage point due to the pandemic. And two, the expected rise in the budget deficit would have an inflationary impact which in the face of a massive scaling down of productive activity due to the virus would require expansionary fiscal and monetary incentives to jump-start output in the economy and thereby ensure that jobs are provided minimizing the need for cash disbursements by the government for the pre-Coronavirus employed - skilled and unskilled. In short, a tight fiscal or monetary policy would not deliver on the new ground realities post-Coronavirus. Thus, the discount rate needs to be further adjusted downward and the old criteria must be supported notably to adjust it to core instead of headline inflation (which includes petroleum and products not responsive to the discount rate in Pakistan in any case) as well as setting the exchange rate to the real effective exchange rate as determined by the State Bank of Pakistan. And the fiscal policy has to remain expansionary to ensure a growth rate that is commensurate with jump-starting the economy.
There are genuine concerns that given that Pakistan is on an IMF programme it would be limited in its ability to tweak the programme targets especially after the IMF Resident Representative to Pakistan specifically stated that the Fund's focus is to urge member countries to ensure "that whatever policy action the government implements has to be targeted, temporary and focused on providing support to the most vulnerable segments of the population." She subsequently added that the policy reforms agreed with the Fund under the programme are not likely to be tweaked and one would support this as the energy sector circular debt has continued to rise with little indication that the power sector has begun to implement meaningful agreed reforms.
There is, therefore, an urgent need for considerable readjustment in targets that may require a revisit of some of the time-bound policies agreed with the Fund in May last year subsequent to the onslaught of the Coronavirus particularly with respect to the growth rate for without an inordinate focus on growth the Pakistan economy would continue to flounder; it would be unable to lift itself out of the mire that the pandemic has pushed it under.