Analysis: FY2020: from adjustment to lockdown

Updated 11 Jun 2020

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The year looks like it will end the same as it began. — Dawn graphic
The year looks like it will end the same as it began. — Dawn graphic

THE year looks like it will end the same as it began, with a massive fiscal deficit and ongoing talks with the International Monetary Fund (IMF). Today when the government’s finance adviser stands up to present the Economic Survey for the outgoing fiscal year, he could not have imagined that all the hard-won space his efforts managed to win on the fiscal side would be erased so rapidly, in a matter of months.

Last year at the same time he was new to his seat and the government was facing a budget deficit equal to 8.9 per cent of GDP (where the projection in July 2019 was 7pc), the exchange was seeing volatility due to declining foreign exchange reserves and the economy was grinding down to a near halt under the prevailing uncertainty of the upcoming macroeconomic adjustment. The details of what had been agreed to with the IMF were only released after the budget, but everybody knew at that moment in time that the economy was set to slow down further once the real brunt of the adjustment kicked in.

That happened after the budget was announced containing a jump in the revenue target of almost 35pc. Growth came in at 3.29pc, according to the Survey released in 2019. This year the National Accounts Committee revised that down further to 1.9pc, meaning the lowest growth rate in 11 years. This year, which was supposed to see a large adjustment followed by a return to growth, this growth rate has fallen further to negative 0.38pc on the back of the lockdowns in March and April.

Rarely has such a dismal outcome faced a government. The prime minister had begun talking about a return to growth as far back as November 2019, months into the adjustment. Hafeez Shaikh was more cautious, but allowed such talk to continue, perhaps because he knew the only disagreement was on the timing. If the country was not ready for growth by November 2019, surely it would be by June 2020, and what is a few months here or there in such large matters?

Stability was indeed returning to the economy, measured primarily by the rising foreign exchange reserves and a shrinking fiscal deficit. It was a hard slog, won through toil and tears, prompting an extraordinary representation from a delegation of the country’s largest businessmen to meet personally with the army chief to ask for some easing of the conditions. That didn’t happen of course. Instead they were told the adjustment is here to stay, but within its constraints, perhaps some special packages can be arranged for them.

The hard slog saw the fiscal deficit drop from 5pc of GDP in 2019 to 3.8pc in 2020 in the July to March period. This may not sound like much, only 1.2pc after all, but it is equal to Rs528 billion, or just under half of last year’s defence budget, to take one point of comparison. In the same period, the current account deficit shrank to $6 million in March this year, where it had averaged more than $1bn all through the previous year. By all accounts the adjustment was proceeding and growing numbers of people in government were looking forward to harvesting its fruit in the next fiscal year.

The lockdowns in Pakistan and the rest of the world undid all that and turned the clock back to the beginning. By April the fiscal deficit was being projected back to a record high of 9.3pc of GDP, rather than 7pc that was the pre-lockdown projection. Remember each percentage point is around Rs440bn, so the jump back up means all the fruits of the adjustment have been lost, since the deficit this year is likely to be higher even than last year when the adjustment began. Later, Moody’s projected that it could even touch 10pc.

The wheel has come full circle and the outlook is grimmer still. Not only will it take another year of intense adjustment, including high taxes and hamstrung expenditures to once again restore fiscal balance, but the fallout from the lockdowns and the continuing spread of the pandemic has not yet ended. Business and industry were only already weary of the steep cost they were paying for the adjustment, now the lockdowns and pandemic have added to their woes, as well as put them in the position of having to weather an additional year of adjustment.

Growth now seems like a distant dream. In the fiscal year about to open up, the government will have to walk an even more delicate balancing act as uncertainty mounts and the economy continues to shrink. Now more than ever, the ship of state needs to be resting on an even keel.

Published in Dawn, June 11th, 2020