FY21: Corona budget

Advisor to the Prime Minister on Finance Dr Hafeez Sheikh stated on a private television channel that the budget for next fiscal year would be presented during the first week of June and would focus on mitigating the impact of the Coronavirus on the general public. Declaring the next budget as the "Corona budget", Sheikh argued that the budget would adhere to the economic principle of direct cash transfers fuelling demand which, in turn, would promote production activities thereby creating jobs and alleviating the suffering of the general public as well as tackling recession.

This principle maybe relevant during normal times however during a pandemic this may not actually work out for two broad reasons. Firstly, the fear of contracting the disease followed by the government's decision to lock down be it partial or complete restricts demand to necessities with food (perishable or non-perishable) in greater demand while all other industrial products are subjected to very low if not zero demand. Hence cash disbursements under the Ehsaas programme, be it for the poor and vulnerable or be it for the daily wagers whose livelihood has been compromised due to the lockdown, are not likely to raise industrial output and therefore job opportunities are unlikely to rise as long as the pandemic continues to rage.

And secondly, the assistance to the industrial sector, large scale as well as small businesses, in terms of cheap loans, deferred utility bills payment and/or the government picking up the bills for small businesses altogether or indeed lower taxes (withholding taxes as well as on imported raw materials and semi finished products) may not be enough to take the economy out of the recession simply because as long as the virus continues to stifle business activity with exporters suffering from order cancellations and those industries catering to domestic demand unable to bear the mounting costs associated not only with the virus but also the government's pre-Corona contractionary monetary and fiscal policies. In addition, the pending tax refunds are simply multiplying the productive sectors liquidity woes leading to large-scale job losses. In this context it is relevant to note that the existing 9 percent discount rate when Pakistan is in the grip of the pandemic is considered still too high by all sections of society - be they independent economists or members of the business community or more recently the economic advisory council members who recently expressed their reservations at the high discount rate.

The International Monetary Fund (IMF) has scaled the growth rate for Pakistan down from the 2.4 percent projection as per the documents on the Extended Fund Facility to negative 1.5 percent - a de-escalation that was acknowledged by the Ministry of Finance during a recent meeting with multilaterals. In an April 2020 publication titled World Economic Outlook, April 2020: The Great Lockdown, the IMF argues that "the global economy is projected to contract sharply by negative 3 percent in 2020, much worse than during the 2008-09 financial crisis. In a baseline scenario-which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound-the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support. The risks for even more severe outcomes, however, are substantial. Effective policies are essential to forestall the possibility of worse outcomes, and the necessary measures to reduce contagion and protect lives are an important investment in long-term human and economic health. Because the economic fallout is acute in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses domestically." Even in the best case scenario with the pandemic no longer raging during next fiscal year any expectation that the country would come out of the existing recession through larger cash disbursements than before appears to be unrealistic.

The government's ability to make cash disbursements however is severely limited due to the pandemic not only shriveling projected revenue but also raising expenditures. The loan disbursements from multilaterals, around 2 billion dollars to date or around 320 billion rupees, are less than half of the 1.2 trillion rupee relief package announced by the government. The next budget would be extremely challenging and one would assume that it would first be run past the Fund even though the EFF remains suspended and may therefore contain some necessary though politically challenging reform measures especially with respect to the poorly performing power and tax sectors.