Marked contraction in Eid spending

According to a section of the media, early indications are that the Eid spending has shrunk by a massive 20 percent - from one trillion rupees last year to 800 billion rupees this year - clearly aggregate demand defined as total demand for goods and services in an economy, has declined in Pakistan.
Reducing aggregate demand was an objective of the staff-level agreement dated 12 May 2019 between our economic team and the International Monetary Fund (IMF) and the rate of implementation of the three 'prior' conditions have certainly contributed to dampening it - market-based exchange rate, higher discount rate and the primary deficit target for the forthcoming budget of 0.6 percent of GDP. These are essentially sound economic policies; however, the devil is in the timing as many economies seeking an IMF bailout package are unable to withstand the economic as well as the political fallout if the implementation period is too short; or almost overnight as was the case here. The question is whether the Pakistani public in general and the Imran Khan-led government in particular can withstand the fallout.
The State Bank of Pakistan has already implemented two of the three prior conditions and consequently the value of the rupee has eroded and the cost of capital risen - elements that dampen not only aggregate demand, given that a significant portion of those in the middle and lower middle income levels spend a given amount each month on imported petrol, but has also further dampened industrial output with a consequent negative impact on employment opportunities. In other words, the erosion in the value of each rupee earned accounts for lower spending for Eid and the rising unemployment accounts for lower income overall. What is disturbing is the fact that Pakistan has large tracts of porous borders, not factored into the staff-level agreement, and higher prices and/or reduced domestic output simply fuels smuggling further or, in other words, the benefit of these IMF-supported economically sound policies maybe to neighbouring countries' productive sectors at least in the initial stages.
Remittances traditionally rise just before Eid and import orders decline due to the holidays - factors that may have contributed to the rupee value stabilising somewhat in the inter-bank rate before the Eid holidays; however spending by families receiving remittances may have also been dampened due to the expectation of a very harsh budget scheduled to be announced next week.
The third prior condition, a contractionary fiscal policy in the forthcoming budget, is on the cards and several meetings between deeply concerned representatives from industry and the Prime Minister have ended inconclusively. The Prime Minister is between the devil and the deep blue sea - if he supports the industrialists then the possibility of a no bailout IMF package looms large and with it the spectre of possible default with devastating repercussions on the government finances as well as the people; and if he supports his economic team then there would be no default but negligible growth, a rise in poverty numbers by millions and rising unemployment with a decided political fallout.
The budgeted expenditure priorities are not yet clear, though what is clear is that the debt servicing component of the budget is likely to rise significantly as a consequence of the rupee erosion (both this year and the next) leaving little for other expenditures. Prime Minister Imran Khan is on record as supporting social sector development over and above physical infrastructure, a priority that one cannot but endorse however government investment in physical infrastructure fuels growth while investment in social sector development accounts for more muted growth.
The start of next fiscal year in July would also be marked by higher utility charges which would negatively impact on the householder as well as industry and agriculture. In other words, inflation is set to rise further than the projected 8.5 percent even though contractionary fiscal and monetary policies coupled with a marked reduction in the budget deficit are on the cards.