Illustration by Rajaa Moini

Why Budget 2021 has increased the odds of a severe recession in Pakistan

The government has a duty to do everything in its power to catalyse growth and prevent economic catastrophe.
Published June 18, 2020

We are living through a socioeconomic crisis unlike any since the Great Depression. With both advanced and emerging economies facing recessions amidst a global pandemic, governments and central banks all over the world are straining to deal with the economic fallout. In poor shape and on its knees before the pandemic struck, Pakistan’s economy is in dire straits. Despite this, the PTI-led government’s initial economic response hit the right notes by extending the Ehsaas safety net to protect the vulnerable and taking measures such as the deferment of utility bills. This raised hopes that the budget would push the envelope further. But it turns out that somewhere along the way, Prime Minister Imran Khan and his team have lost the plot.

The less we talk about this budget, the better. Suffice to say that by delivering an unimaginative budget that does nothing to deliver a meaningful fiscal stimulus, the government has increased the odds of a terribly severe recession in the country.

Why was a bold stimulus important? Because over 90% of Pakistan’s gross domestic product is derived from consumption. The lockdown, a necessity given the health risks posed by the coronavirus, brought both the informal and formal sectors of the economy to a grinding halt. This reduced aggregate demand, which was already weak due to the high interest-rate, low-growth economic stabilisation policies, another necessity, the government was following to deal with yet another balance of payments crisis. Businesses which were already in a precarious position were dealt a body blow and sharply cut output and laid off millions of workers, majority of whom hover precariously above the poverty line.

This means that right around the time of the budget, Pakistan was facing rising unemployment, weak aggregate demand, and businesses struggling to make ends meet. In this precarious situation, there is only one economic actor that can prevent the economy from stalling: the Government of Pakistan. But it has decided to stay on the sidelines, which is why the economy is now staring into the abyss.

At the heart of the issue facing the economy is weak aggregate demand and broadly speaking, there are three labour shocks that will continue to erode demand in the coming months: repatriated labour from the GCC, whose earnings support households across Pakistan, blue-collar labour that has lost jobs in urban centres due to weak aggregate demand, and younger white-collar labour that has recently entered or is about the enter the labour force.

All of this means that household incomes, which are falling because of layoffs and a decline in purchasing power due to high inflation, need to be pushed up to restore economic growth.

Given this backdrop, it is important for the government to roll out short-term employment programmes that put people to work in both urban and rural Pakistan. Projects that restore the environment, plant trees, build/renovate farm-to-market roads, boost literacy, clean water reservoirs, promote literacy, among others should be identified and executed in short order. Workers participating in these programmes should be given incomes based on their skills and these incomes should be paid out digitally to increase financial inclusion and minimise corruption. A transparent portal similar to the Ehsaas dashboard can be rolled out to show how much has been spent in each district for specific projects.

This is just one out of the numerous ways in which the government can help reduce the negative impacts of this crisis. In fact, India is rolling out a similar programme for migrant labour to boost rural demand, vowing to spend over $7 billion in the coming weeks.

Critics will argue that such a programme will have leakages and encourage political cronyism. But that is an acceptable cost, because these leakages will ultimately end up in the economy as consumption spending. Overall, there will be an increase in aggregate demand in short-order, leading businesses to quickly churn up activity to meet this demand.

Others will point out where the government will get the money from. The money can come by borrowing money and running a larger fiscal deficit, which will be much larger in any case if the economy continues to slow down. By spending money today to boost demand, the government increases its potential tax earnings down the road. If the economy remains sluggish, these targets will not be met and the government will end up borrowing a lot more in any case.

This is the most serious crisis Pakistan has faced since the country's independence. By being held hostage to conventional thinking and the diktats of the IMF, the government and its economic team is jeopardising the financial security of tens of millions of Pakistani households. Bold and aggressive steps are a necessity, and the government has a duty to do everything in its power to catalyse growth and prevent economic catastrophe.

Illustration by Rajaa Moini