Steep fixes in tough times – Journal
It is certainly one of the most significant fiscal adjustments Pakistan has ever agreed to make in its history.
In recovering from negative economic performance, for the first time after 1952, the impact would simply be no less than a triple jeopardy – an additional tax burden, reduced spending to improve living standards and payment of their pocket for the same utilities and yet no near future. signs of sagging.
Prime Minister Imran Khan’s government has pledged to increase Federal Board of Revenue (FBR) tax collection by approximately 1.27 trillion rupees (about 2.5% of GDP), of which 750 billion rupees additional tax measures in the next budget.
This is in addition to cuts of around Rs280bn on the development budget, including Rs150bn in the Federal Public Sector Development Program (PSDP) during the current fiscal year and almost a freeze on development and defense spending. as a percentage of GDP over the next five years. A third part and perhaps the most painful of all is the gradual increase in electricity costs to generate nearly 900 billion rupees (almost 2% of GDP) in less than a year. Gas price adjustments would be yet another addition.
IMF now requires parliament to approve laws within time limits unlike previous programs which admitted that the legislature could not be dictated
Carrying out such a difficult task comes with its own risks as the national economy recovers from a 0.4% contraction, leading to job losses, wage cuts and growing poverty. The World Bank estimates that the past and a half years have reversed the gains of the past 20 years in poverty reduction, although there is no clear data to support this at this point.
“Unfortunately, there are no easy solutions and tough choices have to be made in the electricity sector,” Ernesto Rigo, International Monetary Fund (IMF) mission chief in Pakistan, said when asked. asked if it was realistic to conduct these types of operations when the economy and people are trying to survive tough economic times. “Otherwise, it would remain a brake on economic growth.”
But Prime Minister Khan and his new Finance Minister Hammad Azhar have already started talking about renegotiating with the IMF for the serious third wave of Covid-19 after securing the first tranche of $ 500 million under the program. revived. It is interesting to note that the follow-up requirements and the sequence were also reinforced under the program which was relaunched with five prior actions, 10 benchmarks or revised deadlines and 11 completely new structural benchmarks.
Mr. Rigo, however, believes that the objectives of the program and its design cannot be changed, although the sequence can always be revised in light of changing economic conditions. The IMF has published its growth forecast at 1.5% for the current year against 3% anticipated by the State Bank of Pakistan (SBP), rising to 4% of GDP next year, then stagnating at 5 % until 2026. Growth is expected to improve gradually, but will not reach its medium-term potential of 5% in 2023-24, later than forecast in the first EFF review, due to the large shock and the need to continue fiscal adjustment, which should offset part of the impact of private sector strengthening – sector growth on the economy as a whole.
Yet reviews would now take place on a quarterly basis for close monitoring by IMF staff instead of semi-annual reviews as part of the original program which remained virtually suspended for a year. On top of that, for the first time, there are conditions in the program that require parliament to approve measures and laws on time. In previous programs, IMF staff used to engage with parliamentarians for exchange of views and advocacy, but had always recognized that parliament could not be dictated.
The IMF indicates that the authorities have committed to take 3.3% of GDP in revenue measures during the program period ending in September 2022 and on the basis of the fiscal measures agreed for next year’s budget, notes a virtual freeze on defense and development spending in terms of GDP. percentage not only next year, but also over the next five years.
The IMF predicts that the current account deficit will widen to 1.5% of GDP in 2020-2021 due to the recovery and it is expected to continue to widen gradually towards 3% in the medium term with higher imports triggered by domestic demand and revived exports. However, the market-determined exchange rate, coupled with an adequate monetary policy, would help strengthen reserve coverage for more than three and a half months of imports by 2024-25.
Substantial risks cloud the outlook, amplified by Covid-19. These fall under four major groups. First, high uncertainty – especially around the global recovery and therefore prospects for growth, trade and remittances – stems from the second wave of the pandemic and the emergence of new strains around the world. These could reverse the current course of the pandemic in Pakistan and require additional mitigation efforts, especially if national immunization efforts were to stagnate.
Second, policy slippages remain a risk, magnified by weak implementation capacity and influential vested interests. This particularly affects the fiscal area and therefore the sustainability of the debt, including the risk that the provinces do not respect their commitments with regard to budgetary parameters.
Third, failure to meet program objectives, including those linked to the authorities’ AML / CFT action plan with the Financial Action Task Force (FATF), could hamper external financing and investment, the IMF warned. .
Fourth, geopolitical tensions could increase oil prices and an unfavorable change in investor sentiment could affect external financing. At the same time, a benefit to growth and program goals derives from the political calendar. The senatorial elections having taken place in March, there is a window, according to the IMF, to accelerate the reforms until the general elections scheduled for August 2023. The Prime Minister is already showing signs of doubts.
The debt sustainability analysis confirms that public debt remains sustainable with strong policies, but also highlights the risks associated with policy slippages and contingent liabilities. Pakistan’s defense and development budget has already shrunk considerably over the past two years and is expected to remain almost stable at its reduced level over the medium term, i.e. until 2026, under the consolidation budget under the current IMF program.
Documents released by the IMF as part of its revival of its program with Pakistan two weeks ago suggest that Pakistan’s defense budget fell from 3% of GDP in 2017-18 to 2.9% in last year and would be even lower at 2.8% of GDP this year. . It would struggle at the same 2.8% of GDP until 2025-2026.
Likewise, the country’s overall development program, which stood at 4.2% of GDP in 2017-18, plunged to 2.7% of GDP last year and 2.6% of GDP this year. . Development spending is estimated to increase slightly to 2.7% in the next fiscal year, then hover around 2.8-2.9% by 2026, subject to improved revenue collection. .
Posted in Dawn, The Business and Finance Weekly, April 12, 2021