THE uncertainty surrounding the duration and potential economic impact of the Covid-19 health crisis has made the task of country’s finance managers to firm up the budget proposals for 2020-21 quite difficult as the economists are looking at a U-shaped recovery. In other words, the economy is expected to take one to two years to bounce back from the current recession.

Their task becomes harder given the fact that they are required to revive the temporarily suspended International Monetary Fund (IMF) programme from next year. While the government was able to get away with its failings this year because of the space the Fund had helped create by suspending implementation of its $6 billion programme’s reform agenda and disbursing emergency funding of $1.4bn to fight the impact of the Covid-19 shock, it will have little room next fiscal year to help those affected. The IMF is yet to release the third tranche of the loan it was to disburse following the programme’s second performance review.

‘The government can also choose to monetise its deficit by printing new currency. And why not, even if it pushes inflation upwards’

For analysts like Ali Asghar Poonawala, the IMF is unlikely to relax its stringent conditions next year, leaving the government into a policy conundrum. To him, it will take several months before things turn back to normal and the government can do little to speed up recovery because of its financial constraints and international commitments necessary to secure funds to keep its balance of payments situation under control. Until recovery takes place, he adds, the government should spend as much as it can on public services that affect the everyday life of citizens.

Indeed, the government and the State Bank of Pakistan (SBP) have announced significant measures to assist businesses and people affected by the virus outbreak. But those measures are meant to shield them from the immediate effects of the crisis that forced the economy to shutter. They would now be required to constantly evaluate and alter their policy response to support the economy according to how the crisis unfolds going forward and how it changes the domestic and global economy.

The even bigger challenge for the government next year will be the collection of taxes in a depressed economy to meet its growing expenditure. The IMF is pushing for a tax target of Rs5.1 trillion - 7.3 per cent less than the original target of Rs5.5tr and 31pc higher than the revised projection of Rs3.9tr for the outgoing year. No one believes that the government can get even remotely close to the proposed tax collection in the current circumstances without imposing new taxes, something near impossible at the moment because of the stalled economy.

The damage caused by the coronavirus pandemic has been massive as the country’s total economic output is estimated to contract by 0.38pc this fiscal year. The new estimate is based on six to nine months provisional data projected for the whole year adjusted for the impact of the Covid-19 followed by the partial virus lockdown in the country, according to the national accounts published by the Pakistan Bureau of Statistics recently.

The IMF had forecast the economy to grow by 2.4pct and the State Bank of Pakistan (SBP) by 3.5pc. The State Bank had, however, revised down its growth forecast to 3pc before the global health crisis hit the country. Similarly, the Asian Development Bank had reduced its growth rate projection to 2.6pc from its earlier estimate of 2.9pc per cent. The World Bank also had revised its estimate downwards to 1.1pc. Thus, it is safe to say that the growth rate was expected to remain significantly subdued even without economic losses related to the Covid-19 crisis.

Yet the pandemic paced up the downturn and made it contract for the first time in 68 years. Many still insist that economic contraction would be in the range of 1-2pc once the full-year actual numbers are computed. After all, the National Accounts Committee has also revised downwards the GDP growth rate for last year to 1.9pc from 3.3pc based on actual data. The IMF has projected the economy to contract by 1.5 per cent because of the Covid-19 shock. Even before the virus shocked the economy, the Federal Bureau of Revenue was struggling to maintain a 16pc monthly growth in its collection against the targeted increase of 44pc, despite the elevated inflation that peaked to 14.6pc in November.

With its inelastic non-development expenditure, implementation of policies to minimise economic fallout of the virus shock and low tax revenues, the government is most likely to run a fiscal deficit close to 9-10pc of GDP in 2020-21 or close to the revised projection for the current year, according to analysts. That means the deficit financing will be another major policy challenge next year. The sharp plunge in global oil prices, which are forecast to remain low for some time due to declining global demand in a slowing economy, is perhaps the only light at the end of the dark fiscal tunnel as it can help bolster federal revenues from petroleum levies provided domestic prices are maintained.

Other than that, Next Capital CEO Najam Ali says, the government will have the only option of raising its non-tax income through privatisation of Re-gasified Liquefied Natural Gas-based power plants and other assets and significantly cut its development expenditure to make up for the shortfall in taxes. “Or it can also choose to monetise its deficit by printing new currency. And why not even if it pushes inflation upwards,” he told this correspondent from London by telephone, saying the economy is more likely to contract further next year with little chance of recovery because of the Covid-19 unknowns.

Asif Ali Qureshi, who heads Optimus Capital Management, lamented government failure to reform the power sector, which is a big drag on the budget, and document the economy in the last two years. His advice to the government is to fix the tax administration to document the economy and generate more revenues instead of levying new taxes in the present circumstances and restructure the collapsing the power sector to avert further losses and accumulation of circular debt. “The government should forget about other things and totally focus on these two areas next year. If it succeeds in reforming the power sector and documenting the economy, it will create enough resources to support the economy going forward.”

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