A Pakistani stockbroker reacts as monitor share prices during a trading session at the Pakistan Stock Exchange (PSX) in Karachi on December 3, 2018. (Photo by RIZWAN TABASSUM / AFP) — AFP or licensors

As economy grinds to a halt, businesses need a stimulus package but they should prepare to give back

Setting the foundation to kickstart the economy is as important as combating Covid-19 itself.
Published March 24, 2020

After much delay, Pakistan is finally going into a lockdown. This is a necessary measure and one that will hopefully help forestall a tragic humanitarian crisis from unfolding in the country. But the war against coronavirus is only just beginning and it is important to recognise that this war is one that must be waged on both the health and the economic fronts. It is a grim reality that even under a best-case scenario the economic repercussions of this crisis will be devastating. With millions of people locked inside their homes the economy will grind to a halt and businesses, particularly small and medium-sized ones, are facing an existential crisis.

This existential crisis comes on the heels of a devastating macroeconomic crisis Pakistan was only beginning to emerge from. The impact of that crisis has reduced business capacity to deal with what is around the corner. This is why it is important for the government to put together a stimulus package that keeps businesses afloat and enables the economy to kickstart once the immediate crisis recedes. Providing an immediate and effective stimulus is a critical part of the economic strategy to deal with this crisis, as it will ensure that recessionary headwinds facing the economy do not turn into a turn into a perfect storm that brings about an economic depression in Pakistan.

Many have argued that the State Bank of Pakistan should dramatically cut rates to stimulate the economy and that doing so is an integral part of a stimulus package. While rates should prudently be cut to stimulate growth over time, it would do little to keep millions of small and medium-sized businesses that function outside of the formal credit markets. These businesses form the backbone of Pakistan’s economy and keeping them afloat should be the immediate priority for this government.

As people stay at home and businesses remain shut, they are set to face a massive cash crunch that can translate into mass bankruptcies, layoffs, and a domino effect that can shake the very foundations of Pakistan’s economy. To prevent this catastrophe, the government must roll out measures that ease the liquidity crunch that most businesses will face in the coming weeks. An effective way to ease this liquidity pressure is to defer utility bills and sales taxes payable by business for at least the next six months. Businesses that avail this facility can be given an option of paying these bills and taxes when the crisis is over and normalcy returns, or they can have these bills waived off should they consistently pay and file their taxes for the next two years. This measure would provide essential liquidity to businesses — utilities and sales taxes are a large share of their cash flow — while also incentivising those that are not part of the tax net to become compliant in the near future by offering a waiver for these dues.

Secondly, the government should work with the State Bank of Pakistan to provide additional working capital loans to businesses at subsidised rates. Again, the interest payable on these loans should be waived for businesses who are tax compliant for the next two years. This would provide businesses with additional funding at a low borrowing cost at a time when they need it the most and incentivise them to raise funding through formal credit markets.

An economy can function effectively only when both businesses and consumers have access to liquidity for conducting transactions. This is why it is important that cash-starved citizens, particularly vulnerable segments of society with little to no safety nets, are provided cash immediately. This is why the government should immediately increase the size of its cash transfer programs, particularly the Benazir Income Support Program (BISP).

BISP, however, does not cover a broad swath of society, which is why the government should also seed a cash disbursement fund in partnership with reputable non-profit organisations. The proceeds from this fund should be used to provide cash assistance to those who need it but do not qualify for BISP. The government should mandate that businesses taking advantage of either the utility and tax deferral or the subsidised credit facility put 1% of their future revenue over the next two years into this fund as well so that citizens in need of help directly benefit from the economic recovery following the crisis. Private individuals should also be encouraged to donate into this fund and the disbursements from the proceeds should be made by partner non-profit organisations to ensure that the fund does not fall victim to politicisation and corruption allegations.

The above measures can play a key role in providing cash to both businesses and individuals while also ensuring that incentives are in place to make business become part of the formal economy in due course. As this crisis unfolds, the government must recognise that setting the foundation to kickstart the economy is as important as combating the virus itself. This is why efforts must be made immediately to provide cash to both businesses and consumers so that growth returns as soon as normalcy returns to Pakistan.