Between the IMF and Covid-19

There is nothing out of the box in the budget. There is no sort of stimulus to combat Covid-19-related economic miseries. There is no new tax. There is a sense to freeze (non-debt) current expenditure. There are some measures to lower the cost of doing business. There are some promises to improve the tax refund process. There is a check on grants and subsidies. There is marginal increase in PSDP allocation.

Nothing more a cash strapped government - stuck between a rock (Covid) and a hard place (IMF) - could offer. The government is trying to strike a delicate balance. But the numbers are not supporting. Rs4.95 trillion FBR target is as elusive as last year's Rs5.5 trillion. The subsidies are likely to overrun as well. The assumption is that electricity prices are to be revised up after the first quarter. There would be immense political pressure against it and businesses don't have more capacity to absorb this cost. There could be some savings on debt servicing as interest rates might come down by another 1-2 percent in next few months.

Budget numbers are prone to change. The times are fluid. Nobody knows how long it takes for the economy to come back to normalcy. Tax revenues will remain tamed. The government would be pushed to run more stimulus. The Ehsaas programme allocation of Rs200 billion could increase. It is the top achievement of this government. There could be an agriculture crisis due to locust. Add some spending (not budgeted) to it.

There might be no mini-budget to bridge the revenue gap. The deficit target of 7 percent is likely to be missed by 1.5-2 percent. The government is showing commitment through austerity in current expenditure. There is no increase in salaries and pensions despite protest by bureaucracy. There is a minimal increase in defence budget despite growing tensions with India. There is some reduction in grants. The government has to start privatizing the SOEs and should get rid of electricity and gas distribution companies.

The problem is that the fiscal model is not sustainable. Persistently, high fiscal deficit will come to haunt. The monetization of debt will crowd out private credit and would create inefficiencies in the system. Tax revenues cannot be enhanced in days of negative or low economic growth. Expenditures are inflexible. The only way to go is by boosting economic activities.

Some say PSDP spending is the way to go. Not really, there is no evidence of high economic returns of infrastructure spending by the government. It is inefficient and projects' viability could be questioned. The best way is to support: private sector for reviving economic growth. Fix the NAB problem, win the trust of bureaucracy and kickstart the public private partnership model. The NHA has its asset base; let it finance its own projects.

Construction through private sector is the recipe in such times. The government has the land bank. Let it be available for the private sector. After retail and wholesale sector, construction is the biggest employer in urban centers. The government has allocated Rs30 billion for the Naya Pakistan Housing project. It should be used to subsidize credit for builders and consumers. The government should not construct houses itself.

That is why reducing the frictions in private sector doing business is so important. The government is relaxing its limits of documentation for traders. There are incentives on using digital tools for retailers. The government is giving carrots to bring retailers into the net.

The focus is shifting from tightening screws on non-filers and stiff policies for stabilization to come up with a policy framework to kickstart the economy. The emphasis should be on utilizing excess capacity in cement, steel, auto and many other sectors.

But the big unknown remains Covid-19. The wide assumption in the budget numbers is that life will be back to normal by September. What if that does not happen?