THIS will be the Covid-19 budget. More than building the future, the focus will be on how long to remain in the rescue phase and how to make various sectors and segments of society stand on their feet.

These are unusual times for the economy, which is projected to grow by negative 1.5 per cent, the worst in almost 70 years, mainly because of a severe contraction in the last quarter of 2019-20 in almost all sectors, except agriculture. Foundations will have to be built from scratch.

Also read: Budgeting in the time of Covid-19

Reform, restructuring and rightsizing appear to be the likely victims before the recovery phase sets in. As things stand now, demands for the next budget coming from various sectors of the economy and stakeholders suggest nobody is in the mood to contribute to the kitty. Everyone wants to be the recipient of public funds that are already scarce.

The budget preparations will also be unusual. As of now, schedules of budget-related engagements at various levels of government are uncertain. It is also unclear if all the statutory or constitutional manuals for the budget preparation can be followed.

Usually by this time, the budgetary processes are halfway through and the timelines for mandatory meetings of centre-provincial decision-making forums finalised. But the routine priority committee meetings to finalise the development programme are not in sight. Ministries, divisions and agencies have been asked tersely to limit their demands for grants and funds to projects already approved and those responsive to Covid-19.

Ministries, divisions and agencies have been asked tersely to limit their fund demands to already approved projects

The budget makers have given an indicative ceiling of about Rs600 billion to various ministries, divisions and agencies for next year’s development budget, including Rs70-80bn for Covid-19–related schemes. This is almost 15pc lower than the current year’s budget allocation of Rs701bn and in line with the Rs586bn expenditure ceiling indicated by the International Monetary Fund (IMF).

The IMF has already hinted at curtailing the current year’s development budget to Rs488bn (against Rs701bn) and provincial development spending to Rs461bn against the initial allocation of Rs912bn. The IMF anticipates the provincial development ceiling for the next year at Rs694bn. On the basis of these, the IMF expects the current year’s fiscal deficit at 9.3pc of GDP and that of next year at 6.6pc instead of pre–Covid-19 estimate of 5.8pc. With the low base of current year’s negative 1.5pc growth, the IMF expects GDP growth to rebound to 3pc.

It is still unclear if the centre will be able to hold a formal huddle for the Annual Plan Coordination Committee (APCC) to put together the development strategy for the centre and the provinces for 2020-21. So there is a likelihood that development plans will be directly taken to the National Economic Council (NEC) soon after Eidul Fitr. Even this highest economic decision-making body may meet virtually.

No wonder then the federal and provincial governments will need to think differently. The recent discussions about undoing the 18th constitutional amendment, therefore, are unfortunate and so is the untimely debate about redrawing the National Finance Commission (NFC) award. Such a political discourse only deters the cooperative financial engagement needed to jointly absorb the unprecedented economic shock.

What is clear at this stage is that the 7th NFC award notified in 2010 for five years is completing its fifth extension. There is no option other than continuing it for another year. There are certain areas where the centre can pass on some of its undue expenditures to the provinces in line with provincial responsibilities. But then the provinces are more than compensating the centre by offering sizable cash surpluses out of their guaranteed shares. For example, so far in the first nine months of the current fiscal year, the provinces have jointly provided a Rs344bn budget surplus to the centre as opposed to Rs292bn last year.

The announcement of the federal budget is being targeted for the first week of June. Based on various assessments, the government estimates GDP growth to stay between -1.5pc and 1.5pc and large-scale manufacturing going down by 4.3pc over a 2.06pc decline in 2018-19. It expects the revenue collection to be around Rs3.9 trillion — almost Rs1.64tr or 4pc of GDP short of the target.

The government also estimates the fiscal deficit at 9.4pc of GDP, current account deficit at $4.5bn and exports at $21bn, imports at $40bn and remittances and foreign investment at $20bn and $2.5bn, respectively, for the current year. It expects the urban economy to contract by 30-40pc.

The Economic Affairs Ministry has concluded Pakistan’s debt will witness a significant increase. The public debt is assessed to be sustainable, but risks have increased substantially, the ministry believes.

It foresaw that owing to the contraction in economic growth and fall in workers’ remittances, unemployment will increase and so will poverty. Currently, 24.3pc of the population is living below the poverty line, according to official estimates. “It would continue to put pressure for increased social safety spending in the near future even after combating the pandemic successful.”

Published in Dawn, The Business and Finance Weekly, May 11th , 2020

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