ISLAMABAD: The federal government has identified adherence to budgetary targets, energy sector circular debt, revenue collection and the risk of continuation of the pandemic or natural disasters as primary challenges, fearing the possibility that any reduction of global demand would impact Pakistan's GDP and eventually tax receipts.
Fiscal Policy Statement-January 2021 available with Business Recorder has revealed that the debt per capita of the country has increased to Rs 175,000 following rise in the total public debt to Rs 36.4 trillion – 87.2 percent of the GDP – by the end June 2020. Total public debt recorded an increase of Rs 3,691 billion during fiscal year 2019-20.
The Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005 requires federal government to take measures to reduce federal fiscal deficit and maintain total public debt within prudent limits.
According to Fiscal Policy Statement, Federal fiscal deficit (excluding grants) was recorded at Rs 3,601 billion or 8.6 percent of GDP during fiscal year 2019-20, thus remaining higher than the threshold prescribed in the Act. Interest payments on debt obtained by the previous governments constituted a major share in total interest payments during fiscal year 2019-20. The government paid Rs 2.6 trillion against interest payment on the debt, mostly obtained by previous regimes, during the period under review and also used a portion of its cash balances to finance the federal fiscal deficit, leading to a reduction in the total public debt stock. According to the statement the currency devaluation impact was much lower in fiscal year 2019-20 as rupee depreciated only by 3 percent against US dollar during the year.
Economic indicators were very encouraging during the nine months (July to March) of the fiscal year 2019-20. However, by March 2020 the COVID-19 pandemic had engulfed almost the whole world, posing grave new socioeconomic challenges, especially for the developing countries. Initially conceived as a health challenge, COVID-19 turned out to be an economic threat, having the potential of destabilizing the international economic system.
Pakistan was no exception and pandemic severely hit the country in late March 2020, which drastically changed the whole economic scenario and the results achieved during the previous nine months were mostly swept away.
The first nine months of fiscal year 2019-20 (Pre-COVID period) witnessed positive changes in the economic indicators as during the period (July 2019 to March 2020) compared to the same period of fiscal year 2018-19, current account deficit was reduced by 75 percent and fiscal deficit decreased from 5 percent to 3.8 percent of GDP. Primary surplus of 0.4 percent of GDP was achieved for the first time in last 10 years. The federal board of revenue (FBR) revenue witnessed an increase of 17 percent and was on the track to achieve the massive target of Rs 4.8 trillion whereas non-tax revenue increased by 134 percent.
However, in the post-COVID-19 period-April to June 2020-, most of the achievements were lost. The economic repercussions of the pandemic affected industry and retail businesses adversely and reduced GDP growth projection from 3.3 percent to -0.4 percent and the estimate for the budget deficit were revised from 7.1 percent to 9.1 percent. On the fiscal side, the successes of first nine months were lost in the next three months due to reduced economic activity, huge loss of revenue, high expenditure owing to COV1D-19, and lower provincial surplus, which led to an increase in the fiscal deficit. However, despite the unstable economic situation fiscal year 2019-20 was closed with better than expected fiscal outcomes.
Strong fiscal position of the federal government (Pre-COVID) was challenged by the outbreak of pandemic during last four months of the year. Pressures emerged simultaneously on both expenditure and revenue sides. The earlier gains had created enough fiscal space to deal with COVID-19 shock and kept the full year federal primary deficit lower than the last fiscal year.
The above stated position clearly reflects that departure on fiscal side was beyond control of federal government primarily due to COVID-19 pandemic. This departure is temporary and the federal government has taken various measures including grant of economic stimulus package to mitigate the adverse impacts. The pandemic is a global challenge and the Government of Pakistan is committed to taking all measures to ensure continued abidance with the principles of sound fiscal management.
The federal Government, in collaboration with the provincial governments, has effectively managed the COVIO-19 pandemic. In budget fiscal year 2020-21, one of the key priorities of the Government is to protect the vulnerable segments of society through social safety initiatives.
As the pandemic continues, the Government has carried forward the unutilized Stimulus Package funds of Rs 540 billion to be spent during the FY 2020-21. The economy is moving progressively along the adjustment path and stabilization process. The government is focusing on bringing improvement in the real sector through growth in agriculture, industrial and services sectors.
Pakistan started fiscal year 2020-21 on a positive note and significant progress has already been achieved on several fronts in a fairly short time span. The medium-term fiscal objectives are firmly back on track supported by strong domestic tax performance while social spending has increased.
Copyright Business Recorder, 2021
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