Site icon Pakistan & Gulf Economist

New budget under COVID-19: how to equip economy with gears

New budget under COVID-19: how to equip economy with gears

These are extraordinary days where extraordinary steps and out of box solutions are required. Budget deficit was estimated around 7.2 percent in fiscal year 2019-20 which is around 8.9 percent; likewise budget deficit is being estimated at around 9.1 percent which will cross 10 percent when the actual numbers will be calculated in 2021. Pakistan’s public debt has risen by almost 40 percent in the past two years; from Rs. 30 trillion to Rs. 41 trillion. As a percentage of revenue, debt servicing has gone up from 37 percent to 62 percent within one year and per capita income has further shrunk to USD 1,271 from USD 1,363.

It’s a worldwide depression while every country is struggling to cope with the current crises. In this situation; expecting any grants, aids or financial support from friendly countries would be an unrealistic expectations. Pakistan imports more than what it exports. In coming months and years; it seems exceedingly difficult that Pakistan would be able to maintain its exports even at a level of last fiscal year i.e. 2018-19. US and Europe are two biggest exporting territories for textile products of Pakistan and it seems very difficult that US and Europe will continue importing textile products from Pakistan at the same level. Therefore, we see a drop in exports in next fiscal year, which means loss of revenue for the government, less foreign exchange and less tax collection. It is suggested that Pakistan should seriously cut its imports and stop smuggling what so ever. Pakistan has an agri economy and its share in the global economy is very minimal hence, if smuggling is controlled, economy is documented and imports are cut; Pakistan can even recover from its current crises relatively easily as compared to many other countries.

Ministry of Finance has announced that GDP of fiscal year 2019-20 would be minus 0.2 percent, where a couple of years back it was 5.6 percent. This would be an interesting case study to assess what actually has happened with the economy as this drop cannot be attributed to COVID only. COVID impact would be on the last quarter of fiscal year 2019-20 and would be most probably be on the entire fiscal year 2020-21. One can’t blame COVID-19 for the negative growth rate as it has only impacted last three months of the fiscal year 2019-20, therefore, it is important to assess the situation properly and accurately. Initial estimate of GDP is minus 0.2 percent but when the numbers will be firmed up next year; GDP of fiscal year 2019-20 would actually be around minus 2 percent, which would be new low in the history of Pakistan.

State Bank has tried to control the inflation through managing interest rates though it doesn’t apply fully on Pakistan’s situation. Due to hot money attraction; the State Bank kept the interest rates at a higher level despite the fact that inflation rate was not that high. It was suggested to the State Bank to reduce the interest rates in one go instead of in piece meal, which has actually diluted the overall positive impact of reduction in interest rates. Post COVID lockdown; most of the companies in Pakistan are now facing cash constraints. Pakistan has paid very high price due to hot money; independent economists were never in the favor of highinterest rates and were raising their concerns for the last two years; but State Bank didn’t consider. As a matter of fact, Pakistan only attracted hot money of USD 3.4 billion, which was much less than what it was initially envisaged. Therefore; there was no point in keeping the rates so high. Presently hot money of only USD 280 million is in the market while a large portion of hot money has already been withdrawn from the market.

Interest rate at current level of 8 percent is even high in present day scenario. During Shaukat Aziz’s government; interest rates were as low as 4 percent; and we saw that investors were taking loans from the banks and were investing in stock market and real estate sector. Somewhat similar situation has now arisen; Government of Pakistan has issued a Rozgar Scheme for business in Pakistan where they can borrow from State Bank through commercial banks with the assurance that employees will not be laid off. The interest rate of Rozgar Scheme is quite low, it is even lower than the interest rates banks are offering on the bank deposits. So a lot many companies while still running their business with sufficient cash balances are availing Rozgar Scheme thus making profits on their bank balances on a net-net basis. What government can do in this situation.

[ads1]

 

Local industry is shut down due to COVID-19, as a matter of fact, there are around 18,000 industrial units in Karachi alone, where only 1,000 industrial units are currently in operations these days. Government has announced various SOPs for industrial units but a vast majority are not following those SOPs. Business needs to follow the SOPs otherwise things will even get worse in coming months.

While looking at the budget; it is clear that certain aspects have been ignored. Budget should include some special steps for the people living under the poverty line and for the people recently laid off. Further, Pakistan needs to redesign its fiscal policy, where more taxes should be levied on wealthy class. Wealthy class should also consider donating more. Pakistan’s tax system is not efficient and most of the imbalance is coming from this inefficiency. Government gives heavy subsidies and most of it goes in the pockets of rich class instead of giving benefit to the deserving. Government’s financial support to sick state owned enterprises has now even exceeds the defense spending. This is alarming and despite promises nothing has been done so far to control the bleeding of state owned enterprises.

Unfortunately, health and education sectors couldn’t get much attention of budget makers. In coming months; government should focus on agriculture, renewable energy (less reliance on imported fuel), health, education and IT sectors along with controlling the smuggling.

Interest rates have now been reduced by the State Bank yet payment of interest in next fiscal year is increasing rather than coming down. Government is heavily relying on loans and budget is made on the assumption that all shortfalls in revenues will be funded by taking more loans. Certain concessions have been offered to the capital market, tax holidays are being offered to certain greenfield projects and sectors whereas subsidies are also being given. These fiscal concessions are not even required at the first place in such testing times.

Moreover, government should prioritize its expenditures; instead of increasing the subsidies and grants for the low income group, almost Rs. 400 billion has been slashed in subsidies and grants. System of giving subsidies and grants is not transparent, which is actually creating problems. Secondly, development spending should increase, development spending is fixed at Rs. 1324 billion in fiscal year 2020-21 as compared to Rs. 1301 billion of fiscal year 2019-20. There is actually no addition in the development spending rather it’s a reduction if we adjust it with inflation and exchange rate. As per an estimate, national income increases by two rupees if 1 rupee is spent on the development. Therefore it is required to allocate more budget for development.

Budget makers claim that it is a tax free budget and no new taxes have been levied in the budget. Revenues have been overstated because, total collection for fiscal year 2019-20 is around Rs. 3900 and it is estimated that there would be a drop of around Rs. 400 billion in tax collection next year therefore, this shortfall will be recovered from further reduction in the development spending and additional cut in grants and subsidies. If one carefully reviews the budget; one can easily observe that numbers are not adding up. The budget is apparently prepared to fulfill the formality of presenting the budget. It is quite evident that there would be various mini budgets in coming months and government will keep on changing its numbers, targets and strategy during the year.

Exit mobile version