THE PTI government is in problem. It has apparently failed miserably on the economic front. The National Accounts Committee recently revised downwards 2018-19 economic growth to 1.9 per cent from the initially estimated 3.3pc. The committee believes that even in the best-case scenario, the economy will contract by 0.4pc during this fiscal year.

The Covid-19 pandemic is here. The novel coronavirus is spreading across Pakistan with experts telling us that the peak is expected in June. If their data reading is right then the entire first quarter of the next fiscal year, July-September, will offer no major opportunity for a quick economic revival.

Between March 17 and May 15, the central bank cut its key interest rates, in four instalments, to 8pc from 13.25pc. Businesses continue to demand a further cut. The small and medium enterprises (SME) sector demands the interest rate must come down to 3pc. A visible power tussle between the federal and Sindh governments continues to weaken democracy besides compromising the prospects of economic revival.

Preparations for the next year’s budget are in full swing. The key issue is the creation of fiscal room for financing a reduced outlay of development expenses while allowing some increase in defence expenses because of persisting tension on the eastern border. The International Monetary Fund’s (IMF) lending programme is intact. But to keep it running, the government has to accommodate some of the suggestions that the Fund is offering for belt tightening and growth in revenue generation.

In the first nine months of 2019-20, investment in National Savings Schemes fell to Rs160.4bn from Rs312bn a year ago

In the next fiscal year, revenue generation will become all the more important for the government. Chances for decent growth over this year’s are slim.

The reason is Covid-19–prompted lockdowns and disruption in business activities on top of a general slowdown in the economy. Sales and profits have plummeted, leaving firms unable to pay enough taxes. The need for focusing on non-tax revenue is, thus, quite obvious. But state-owned enterprises (SOEs) are still not in shape. In fact, they continue to devour tens of billions of rupees worth of subsidies. The profit of the central bank is accounted for as non-tax revenue, but this source of revenue generation, too, remains less promising than a year ago. The activities of the State Bank of Pakistan’s (SBP) in the foreign exchange market — which used to help it make profits — have become less intense following the exchange rate stability. And the fact that the central bank has taken upon itself to partly finance Covid-19–related concessional loan schemes will eventually leave little in the shape of annual profit.

The government continues to borrow excessively from banks to meet fiscal needs and the trend may continue unabated in 2020-21. That means the private sector’s crowding out seen during this fiscal year will continue next year. The government’s dream, therefore, to achieve 2pc GDP growth in the next fiscal year, too, would be dashed. And that would be too painful for people and politically too costly for the PTI government.

What the government can, therefore, do to avoid the emergence of this situation is a fuller focus on the mobilisation of non-bank borrowing, the most notable being the investment in national savings schemes (NSS). But the problem is the massive cut in interest rates has led to a matching reduction in NSS rates and at those rates, generating additional investment — and that too amidst recession and economic slowdown — seems out of the question. The situation is really very challenging, if not alarming.

To make matters worse, Moody’s Investors Services has placed five top Pakistani banks — Allied Bank, Habib Bank, MCB Bank, National Bank and United Bank — on review for downgrade. The decision was taken days after Moody’s placed the government of Pakistan’s B3 rating on review for downgrade.

The global credit rating agency’s concern is that if Pakistan requests — and Moody’s expects that it will — bilateral official sector debt service relief under the recently announced G20 initiative, it will entail a default on private-sector debt. The PTI government says it has so far not sought such debt service relief under the G20 initiative. Moody’s thinks that if bilateral debt service is actually sought, the government’s potentially weakening creditworthiness will also weigh on the creditworthiness of these banks “given the high credit linkages between their balance sheets and sovereign credit risk”. In plainer words, Moody’s is concerned about the creditworthiness of these banks because they are the main lenders to the government.

So major banks are anxious about the future — a downgrade or no downgrade by Moody’s. That anxiousness can make them cautious in further lending to the government and SOEs at least till the time the entire issue is resolved. But that does not mean they will automatically shift to greater private-sector lending. For private-sector borrowing from banks to happen, a strong demand is the first requirement and that will remain missing, despite the interest rate cut, till consumer demand picks up. Right now, most companies are borrowing from banks at cheaper rates just to retire their previously taken pricey loans. That along with the fact that the economy this year is in recession has rather reduced net private-sector credit off-take.

In more than 10 months of this fiscal year (up to May 8), the private sector’s net fresh borrowing from banks totalled just Rs298 billion, down from Rs563bn in the same period of last year. An additional reason for a slower-than-expected increase in net credit after the interest rate slashing is that many borrowers, mostly from the SME sector, are not being entertained by banks.

Coming back to the government’s need for borrowing more via NSS, no silver lining is in sight at least till June. The reason is people are drawing on savings for meeting daily expenses amidst the ongoing economic hardship.

In the first nine months of this fiscal year, the investment in NSS fell to Rs160.4bn from Rs312bn a year ago. — MA

Published in Dawn, The Business and Finance Weekly, June 1st, 2020