Pakistan’s economy is on the path of recovery, at a slower pace though, despite a persistent second wave of COVID-19 pandemic. It might take another six months to reach to the point where the Pakistan Tehreek-e- Insaf led government took over from after winning 2018 elections.
The economy had crossed over $300 billion mark but nosedived to around $264 billion for the last fiscal year. Given this the country economy will have to grow at a higher pace of growth trajectory for achieving the size of over $300 billion.
The per capita income has also decreased in the last two years so the country will have to catch up in the coming year to reach to the point where it had left two years back.
The GDP growth rate for FY2020 is estimated at negative 0.38 percent on the basis of 2.67, -2.64 and -0.59 percent growth in agricultural, industrial and services sectors respectively. For FY2020, the negative performance of both Industry and Services overshadowed the growth in the agriculture sector. On a monthly basis, the growth in large scale manufacturing had gone down negative over 10 percent in June 2020. Now the LSM growth has witnessed rebound indicating that the positive growth in the range of 5 to 6 percent will set the stage for achieving slight positive GDP growth for the whole financial year 2020-21.
The performance of the agriculture sector and services sector will depend upon the pace of achieving growth as the multilateral donors are projecting GDP growth ranging from positive 0.5 percent to 1.5 percent. The government has projected a GDP growth rate of 2.1 percent for the ongoing financial year. It is yet to be seen how much growth momentum the country achieves for the current financial year.
There is one positive development in the wake of increased remittances as the country received over $2 billion inflows consistently for the last six months. It's good omen for the country but there is a need to ascertain the fact whether its short term phenomena because of layoffs of Pakistanis abroad especially in the Gulf region and who are returning with their savings or its sustained for longer and durable timeframe.
With increased dollar inflows in the shape of remittances, donors’ generous help especially from IMF, World Bank and Asian Development Bank, debt suspension from G-20 countries to the tune of $1.8 billion and restrictions on foreign traveling helped achieving current account surplus in first five months of the current fiscal year.
The inflation that was still in the range of double digit is all set to fall and touch single digit in coming months. The average inflation should recede and touch 8 to 8.5 percent for the whole financial year but it depends upon the governance structure of the incumbent regime as administrative price increase of the energy sector or supply shocks might escalate the inflationary pressures. This incumbent regime has a potential to give any kind of shock at any point of time to push up prices otherwise the overall average inflation must come down.
Some political developments are also taking place having far reaching negative impact on overall macroeconomic situation of the country. The lackluster approach towards the revival of IMF programme might continue for more months until the political dust settles down. Pakistan and the IMF officials have been working behind the scene to bridge the gap for completion of second review and approval of the release of third tranche of $450 million under the Extended Fund Facility (EFF).
The PTI led government made commitment and conveyed to the IMF a raise in electricity tariff by Rs3.30 per unit in a gradual manner which simply means Rs300 billion burden would be passed on to the consumers annually.
The government made up its mind for clearing Rs450 billion outstanding dues of IPPs on the basis of three major conditions. It is yet to be seen how these conditions will be fulfilled but keeping in view supply constraints in coming months, the powerful quarters of the country are asking for clearing the backlog so that the monster of circular debt would not choke smooth supply of power.
On the fiscal side, the government and IMF agreed on withdrawal of a large number of tax exemptions in the next fiscal year. The large number of sales tax and other tax exemptions would be abolished in budget 2021-22 with effect from July 1, 2021.
With regard to withdrawal of corporate income tax exemptions, the IMF and FBR teams would further deliberate after the New Year holidays but abolition of these exemptions would have no impact on revenue collection because it would come into force from next fiscal year.
The FBR collected Rs2,204 billion in first half (July-Dec) period of the current fiscal year and now the tax machinery will be facing a gigantic task of collecting Rs2,759 billion in the remaining (Jan-June) period to materialize the desired target of Rs4,963 billion for fiscal year 2020-21.
The collected revenue of Rs2,204 billion is 99.7 percent of the six-monthly target of Rs2,210 for the current fiscal year from July to December which showed a growth of 5 percent over Rs2,101 billion collected during the same period last year 2019-20.
Now the FBR requires almost 30 percent growth for achieving the desired target of Rs4,963 billion which seems almost impossible.
The FBR could collect Rs4500 billion to Rs4,600 billion so a shortfall of Rs300 to Rs400 billion seems on the cards.
The government is left with no option but to convince the IMF to allow hike in the budget deficit or slash down the development program.
A combination of both could be a viable option if agreed to by the IMF and then the staled IMF program would be revived.
Keeping in view all these developments on macroeconomic front, the fiscal slippages could pose potential challenges for the incumbent regime so the missing out of overall budget deficit might go beyond agreed limit of 7 percent of GDP by end of the current fiscal year.
Even with positive growth rate of 1 to 2 percent of GDP, the rising poverty and unemployment will continue haunting voiceless people of Pakistan. The government must adopt special focus on providing jobs and protecting the vulnerable in years ahead.
The writer is a staff member