The coronavirus appears to have a contagious economic impact on Pakistan. As federal and provincial authorities sit together reporting situations in their respective sectors and areas, much larger than previously estimated economic losses are coming to the fore and counting.
From exports to revenues, from industry to trading, from tourism to entertainment and from transport to commercial activities — the reports reaching the ministries of commerce, planning and finance are depressing. The provinces, Azad Jammu and Kashmir and Gilgit-Baltistan have started to feel the pinch of efforts aimed at restricting the spread of the deadly pandemic.
Initial estimates for the losses range from a minimum of $10 billion (more than Rs1.5 trillion) and will keep increasing in case of prolongation of lockdown efforts. The lending and donor agencies are committing financial assistance and more than $600 million loans and grants have so far been firmed up. The authorities have started working on a rescue package for various sectors of the economy.
This comes at a time when the current year budget was already under pressure. Revenues were significantly behind targets and expenditures on security, pensions and subsidies were going up. Being under the stabilisation programme of the International Monetary Fund, the government was banking on non-tax revenues, lower oil prices and the resultant cushion to increase the petroleum levy and cuts to the development programme were expected to contain the fiscal deficit.
Major benchmarks for the next year’s budget cleared by the cabinet are already becoming irrelevant even before the budget exercise comes into full swing
Major benchmarks for the next year budget cleared by the federal cabinet last week are already becoming irrelevant even before the budget exercise comes into full swing. For example, the Federal Board of Revenue has reported its estimates of revenue loss during the current fiscal year at Rs300bn and the Ministry of Commerce is anticipating $2-4bn export loss this year depending on how the situation in global economies unfold.
This will also have a base effect on next year revenue targets. In the given circumstances, in all likelihood, the budget strategy paper’s projections for about one trillion rupees additional revenue for the next year will remain a far cry. A major non-tax revenue stream of around Rs300bn targeted through privatisation proceeds during the current fiscal year has already become uncertain given the weakening investor confidence. The falling rate of inflation due to declining oil prices and the resultant cut in the key policy rate is also likely to negatively affect central bank profits — another major source of non-tax revenue.
Contrary to media reports that government had lowered its current year’s GDP growth rate projections under the budget strategy paper; the Ministry of Finance had built its current year budget strategy on a growth target of 2.4 per cent and an inflation rate of 11-13pc. In its budget strategy paper, the finance ministry has claimed the growth rate for the current year at 2.6pc and inflation at 11.7pc — almost unchanged from the budget announced in June 2019.
About Rs300bn would be spent on social safety programmes. Of this, about Rs93bn has already been committed by the international agencies
However, the Covid-19 will have a significant impact on the growth rate this year. This is based on the assumption that about 50pc of the development spending is usually spent in the last quarter of a fiscal year and such expenditures are already losing focus both at the federal and provincial level as normal construction and related activities come to a halt.
Those working on budget-making also have to now consider diversion of Benazir Income Support Programme funds towards daily wagers in hotels, transport and other small businesses whose livelihoods have been affected by the closure of towns and cities.
But as they say, every crisis can be an opportunity. The Covid-19 has affected most of the global economies which should provide a room for the International Monetary Fund (IMF) to relax stance on critical programme benchmarks. In fact, the situation also provides an opportunity to access emergency funds allocated by leading international lending agencies to fight coronavirus.
However, unlike past events, there is a limit to international financial support this time, given the pandemic has reached over 170 countries and counting. Whatever fiscal space developed is being utilised by rich countries for their own economies. Funds for budgetary support for next year would, therefore, remain limited from external sources.
That also means the next year’s GDP growth rate at 3pc would remain questionable. Under the macroeconomic framework, the government was targeting 4.5pc and 5.1pc growth in 2021-22 and 2022-23 respectively. Therefore, additional revenue generation through the withdrawal of special tax treatments and expansion of the tax base would be equally unrealistic as the authorities were targeting an increase of 1.7pc of the GDP in the tax to GDP ratio to 12.5pc in 2020-21.
As a spillover impact, the budget deficit target of 7.1pc for the current year has already been revised but the next year target of 5.8pc is uncertain. It would be then unimaginable for public debt to GDP ratio coming down to 81pc in 2020-21 or 79pc in 2021-22.
The provincial surpluses committed at Rs423bn for the current fiscal year have already been revised downward to Rs90bn. As such, the next year provincial surplus of Rs531bn would also have to be revised downward given the additional expenditures being made by the provincial government.
The government has now to keep top spending priorities on health security because of coronavirus, food security and agriculture due to the locust attack, besides the development of tourism, socio-economic pressures and harmonisation of pay and allowances. As such, about Rs300bn would be spent on social safety programmes. Of this about Rs93bn ($600 million) has already been committed by the international agencies. The IMF has also agreed not to treat Covid-19 related expenditures against budget deficits.
Published in Dawn, The Business and Finance Weekly, March 23rd, 2020