NationalVOLUME 15 ISSUE # 22

Ambitious fiscal targets

The government expects a quick economic recovery when the spread of the coronavirus slows down. Pakistan has suffered a loss of over Rs3 trillion to the national income after dismal economic performance last fiscal year as all indicators painted broad-based setbacks. It has set ambitious fiscal consolidation targets in the current year budget, which will be difficult to achieve because of the pandemic.

The Pakistan Economic Survey 2019-20 shows all fiscal targets were missed by a huge margin in the last fiscal year. The survey paints a gloomy economy of the economy. The pandemic has played havoc with the Pakistan economy, like elsewhere in the world. The data released by the government presents a poor performance as all economic indicators have nosedived and the government blames Covid-19 for a loss of over Rs3 trillion to the national income. Like the last fiscal year, uncertainty persists because of the pandemic.

According to Fitch Ratings, one of the three major global rating agencies, Pakistan’s fiscal consolidation targets presented in its FY21 budget on June 12 will be difficult to meet amid the economic shock and health crisis because of the coronavirus pandemic. Pakistan’s public finances are a key credit weakness. “The new budget forecasts a decline in the fiscal deficit to 7pc of GDP in FY21. However, this assumes tax revenue will increase by 28pc from the estimate for FY20 and will prove to be challenging in the absence of new tax measures, especially if the economic growth remains slow,” it noted.

The rating agency has forecast deficits of 9.5% of GDP in FY20 and 8.2% in FY21, pushing the public debt-to-GDP ratio up to 89% of GDP. However, it projects that the ratio will begin to fall after FY21, but this depends on the government’s ability to make progress in fiscal consolidation and on GDP growth rates. The government’s limited fiscal headroom within its rating category will constrain its ability to provide a more robust fiscal response to the coronavirus as the number of cases continues to rise rapidly in the country. According to the agency, the country’s rating also reflects a fragile external position given the high external debt repayments. Liquid foreign exchange reserves remain low at around $10.1 billion but import compression has increased reserve import cover to about 3.6 months. Moreover, lower oil prices are expected to offset the decline in remittances, which will keep the current account deficit stable at around 2% of GDP through FY21. External liquidity will be supported by the country’s participation in the G-20’s Debt Service Suspension Initiative, which the government estimates will delay servicing payments of around $1.8 billion in 2020. Pakistan also received $1.4 billion of emergency support from the IMF under the Rapid Financing Instrument in April, in addition to its existing $6 billion Extended Fund Facility (EFF). The agency expects the release of accumulated tranches from the EFF over the coming months.

Earlier, the Asian Development Bank projected Pakistan’s economy, which was expected to contract by 0.4pc in FY2020 as the Covid-19 outbreak further restricted economic activity, would regain some pace and grow at 2 percent in the upcoming fiscal year 2020-21. It said overall the developing Asia would barely grow as containment measures to address the coronavirus pandemic hamper economic activity and weaken external demand. “Economies in Asia and the Pacific will continue to feel the blow of the pandemic even as lockdowns are slowly eased and select economic activities restart in a ‘new normal’ scenario,” said ADB Chief Economist Yasuyuki Sawada in a statement. “While we see a higher growth outlook for the region in 2021, this is mainly due to weak numbers last year, and this will not be a V-shaped recovery. Governments should undertake policy measures to reduce the negative impact of Covid-19 and ensure that no further waves of outbreaks occur.”

Risks to the outlook remain on the downside. The pandemic may see multiple waves of outbreaks in the coming period and sovereign debt and financial crises cannot be ruled out. There is also the risk of renewed escalation in trade tensions between the United States and the People’s Republic of China (PRC), the ADB noted.

The World Bank has warned that the swift and massive shock of the pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction. According to its forecasts, the global economy will shrink by 5.2pc, the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870.

Projecting Pakistan’s GDP growth to contract in the second consecutive year in the current fiscal year and touching negative 0.2pc, the World Bank has pointed out that the benefits of decreased oil prices might be offset by falling remittances inflows in Pakistan and India. According to the Global Economic Prospects Report, Pakistan’s GDP growth would continue shrinking in the current fiscal year and it might touch negative 0.2 percent of GDP against a revised projection of negative 2.6 percent for the last fiscal year. The International Monetary Fund (IMF) has also lowered its global growth forecast in the wake of the pandemic.

Pakistan’s economy is badly hit by the pandemic, with GDP in FY20 feared to shrink by -0.38pc. Agriculture contributed to an increase of 0.5 percentage points, while the industrial and services sector are projected to drag the overall growth figure by 0.52pps and 0.36pps. Its hope of making a V-shaped recovery belies the logic and ground realities.