NationalVOLUME 15 ISSUE # 23

Hoping against hope

The government expects a quick recovery after the pandemic passes. Pakistan has targeted growth at 2.3pc in the new fiscal year despite the fact that it missed all goals for the last fiscal year. The economy faces stiff challenges and it is feared the country may not be able achieve its objectives in the second consecutive year.

Pakistan’s gross domestic product (GDP) is estimated to have faced a Rs3tr loss from the coronavirus. The GDP was expected to increase by three per cent with the support of economic policies, but it will now go down by -0.4pc, which means the national income would actually face 3pc to 3.5pc loss during the year. FBR revenues, which were projected to reach Rs4.7tr before the Covid-19 crisis, could hardly be Rs3.9tr. About Rs800b loss occurred simply on account of revenue and the situation did not allow the government to further tighten the businesses and people in revenue pressure but warranted a helping hand to provide them with liquidity to better support the squeezing economy. The government announced a Rs1.2tr economic stimulus package to provide relief to various sectors of the economy and people, and to manage the coronavirus damage in a better way, while the State Bank of Pakistan provided subsidy for the implementation of different programmes to provide support and relief to small and medium enterprises.

Pakistan fears exports and remittances could suffer and unemployment would increase if the lockdowns and social distancing prolonged in the world and in the country. The government has set the Public Sector Development Programme (PSDP) for the next financial year at Rs650 billion, including foreign assistance of Rs72.5b, against the backdrop of the challenges emanating from the coronavirus pandemic that enhanced the importance of public investment to trigger job creation, revive economic activity and, at the same time, alleviate poverty.

According to the government, its major achievements in the last fiscal year were a 73 per cent decline in the current account deficit, which is now under $3 billion. There is also a primary surplus which it achieved in the past nine months. The budget deficit shrank from 5pc to 3.8pc while the International Monetary Fund (IMF) provided an extended facility of Rs6 billion and remittances increased from Rs16b to Rs17b.

The total expenditure for the new year stands at Rs7,136 billion — slightly higher than the budgeted figure for the previous year. Allocations for education have been budgeted at Rs83.3 billion, up 7.9pc from last year’s Rs77.2 billion. Health allocations for the next year have more than doubled (130pc rise) to Rs25.5 billion from last year’s Rs11 billion. The funds would be used to improve health services and digitise the framework. Total expenditure for the Public Sector Development Programme (PSDP) for the next fiscal year has been estimated at Rs1,324 billion, which is 18pc below last year’s budget. Of this, federal PSDP has been allocated Rs650 billion, while Rs676 billion has been allocated to provinces. The fiscal deficit would be 7pc of GDP and has been budgeted at Rs3,195 billion for FY2021. The government aims to pull out the economy from a 0.4pc contraction and go for a 2.1pc growth in GDP for the next fiscal year. Consumer Price Index (CPI) inflation for fiscal year 2021 has been budgeted at 6.5pc, down from a projection of 13pc last year. At least another 10 million people are expected to slip below the poverty line as a consequence of the coronavirus pandemic. “The Covid-19 is expected to have a negative impact on Pakistan’s economy, and the number of people living below the poverty line may rise from the existing figure of 50 million to 60m,” according the Economic Survey of Pakistan.

The government expects a V-shaped economic recovery after the coronavirus passes. However, the Asian Development Bank has warned that economies in Asia and the Pacific will continue to feel the blow of the Covid-19 pandemic this year even as lockdowns are slowly eased and select economic activities restart in a “new normal” scenario. “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,” ADB Chief Economist Yasuyuki Sawada said in a statement.

Moody’s Investors Service, one of top three global credit rating agencies, has also warned that the possible deterioration in the country’s current account deficit, likely depletion in its foreign currency reserves and low tax and non-tax revenue collections due to limited economic activities and anticipated contraction in the domestic economy may weaken the government’s ability to continue paying off the debt on time. It has put Pakistan under watch for possible downgrade of its long-term local and foreign credit ratings, suspecting that Islamabad may default on debt repayments to “private sector creditors” due to economic mess under the coronavirus pandemic. “We have placed the government of Pakistan’s local and foreign currency long-term issuer and senior unsecured B3 rating under review for downgrade,” the US-based rating agency announced.

Fitch Ratings has anticipated that Pakistan’s borrowing will remain higher than what Islamabad has estimated to finance the fight against coronavirus pandemic, which will push its fiscal deficit up to 9.5pc of gross domestic product (GDP) in the current fiscal year. “Pakistan’s fiscal consolidation targets presented in its FY21 budget will be challenging to meet amid the economic shock and health crisis associated with the coronavirus pandemic,” it said and forecast the fiscal deficit at 8.2pc of GDP compared to the 7pc target for fiscal year (FY21). Increased borrowing would push the public debt-to-GDP ratio up to 89pc of GDP, it warned.

According to the government’s own admission, its targets for the current year are ambitious. Whether the government can achieve its goals would depend on the fallout from the Covid-19 pandemic. Pakistan has flattened the pandemic curve. It will create favourable conditions for an economic recovery but a V-shaped recovery would still be difficult.