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.

Updated 04 May, 2020 08:50am

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.

Email


Author Image

Uzair Younus is a non-resident senior fellow at the Atlantic Council in Washington DC.


The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (20) Closed

Fastrack
Mar 24, 2020 10:41am
Very nicely written. We all must learn to pay back. Unless the government has money, the poor cannot be given relief.
Recommend 0
Akshay
Mar 24, 2020 11:21am
IMF predicted 1.8% growth in Pakistan without taking into account Coronavirus halt. IMF downgraded India's 6.2% 2020 forecast to 5.3% due to coronavirus disruption.This is the minimum predicted growth.
Recommend 0
Maria
Mar 24, 2020 11:37am
A very impressive analysis by Mr.Younas we need such type of positive reading to keep us aware of the conditions and to save the people of Pakistan and economy.
Recommend 0
Maria
Mar 24, 2020 11:41am
Very impressive to keep us awar and to improve the conditions of the common people
Recommend 0
gghh
Mar 24, 2020 12:17pm
@Fastrack, do brave and free people need to payback?
Recommend 0
Vikas
Mar 24, 2020 12:39pm
Pakistani businesses give back?? That will be the day. CPEC would have come, Pakistan would be the richest and the most powerful country on Earth. All this would have happened before the non tax paying, self centered, greedy businesses will give back to people and the nation.
Recommend 0
Vikas
Mar 24, 2020 12:40pm
@Fastrack, Seriously Fastrack. Lets hear about the contribution you have made until now? Pray tell, please.
Recommend 0
Fastrack
Mar 24, 2020 01:09pm
@Vikas, If the only job in your eyes is remaining glued to your perceived enemy's free-talking news-site, and getting paid for finding minutest of problems, then no, I don't have a job. Happy now?
Recommend 0
Fastrack
Mar 24, 2020 01:11pm
@gghh, Didn't know my comments hurt you this bad and remain long in your memories. Truth does hurt some.
Recommend 0
citizen
Mar 24, 2020 01:37pm
When our greatest leader khan saheb himself asking for loan waiver from rich countries, how we can expect common poor man to repay the loans? he too got a right to expect a generous loan waiver from government..
Recommend 0
Habiba
Mar 24, 2020 02:18pm
@Akshay, Seriously man, in a time of global crisis like this, you still perform the mental gymnastics to bring out petty India Pakistan comparisons!? We are the common people and we will all suffer in the same manner as all proletariat class.
Recommend 0
M. Saeed
Mar 24, 2020 03:19pm
We are led by people that we willingly vote to take all and give back nothing to us. Imran, or no Imran.
Recommend 0
M. Saeed
Mar 24, 2020 03:23pm
@Akshay, Pakistan is an amazing country. During its most trying days in its nascent times, it was progressing at about 23% growth rate for over a decade.
Recommend 0
Ashraf P
Mar 24, 2020 04:54pm
Pakistan's GDP could be -3% this year according to some experts on TV. Dont know how the debts will be repaid.
Recommend 0
Ashraf P
Mar 24, 2020 04:57pm
@M. Saeed, nothing stops because of a pandemic. You can't expect neighbors to suddenly become friends.
Recommend 0
Asalam 56
Mar 24, 2020 05:47pm
In Pakistan "pay back" is an alien concept.Otherwise the article makes perfect sense.
Recommend 0
Thuthuri
Mar 24, 2020 08:46pm
Imran Khan has no out of the box solution for anything. Good for nothing PM.
Recommend 0
Vijay
Mar 24, 2020 11:39pm
@Fastrack, wonder if you would say the same if you or your family was poor.
Recommend 0
Illawarrior
Mar 25, 2020 05:14am
And where exactly is the government to get all this money from, in a nation where tax evasion is considered a national sport?
Recommend 0
QiXi
Mar 25, 2020 05:27am
@Akshay, when will Pakistan go bankrupt? Can you predict a possible timeline?
Recommend 0