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Economic notes

April 1, 2020

Unified economic response

Opinion

April 1, 2020

Nothing is more important while aiming to mitigate economic disruption, in the wake of the Covid-19 pandemic, than to fashion a unified response fully coordinated across all tiers of governments.

The mitigation measures so far announced don’t meet this test. Governments are announcing different packages but none appears to be in sync with the other. The response strategy has two prongs. First, policy actions that would address evolving economic imbalances. This would include appropriate adjustments in the fiscal, monetary and trade policies. Second, whatever assistance has been decided, what is the most efficient way to deliver it to the target population. We discuss both these aspects.

On the fiscal side, a package of Rs1.24 trillion is in the field which we take it as given for now, though we are of the view that this can be improved. At the outset, we need to clean it up so that only material support entailing fresh or budgeted expenditures is counted.

The allocations for wheat procurement (Rs280 billion) and tax refunds (Rs100 billion) are not admissible as part of the assistance package. Most procurement is done by provincial governments through bank credit while refunds are exporters’ money. The reduction in petroleum prices (Rs70 billion) is also not government money. Gas and electricity subsidy and deferment are either not new expenditure or simply not expenditure.

This leaves the components of income support via BISP/Kafalat Program (Rs150 billion), Labor Package (Rs200 billion), SME Support (Rs100 billion) and Utility Stores support (Rs50 billion). Thus we have a package of Rs500 billion which is about 1.2 percent of estimated GDP.

On the monetary policy side, it must be recognized at the outset that the monetary policy stance adopted since July 2019, in the wake of the Fund programme, needs a review. The monetary policy committee has already made two adjustments in the interest rate totaling 2.25 percent. It is, however, felt that this is not sufficient and a single digit rate is more in line with prevailing recessionary conditions in the economy.

On the other hand, to ease the debt servicing burden and enable continued access to financing facilities, the SBP has taken a number of measures both for individuals and businesses. Banks/DFIs have been allowed to defer the principal amount and entertain applications for interest deferral or refinancing. Besides, the SBP has allowed numerous waivers for fees and charges to encourage on-line banking and digital payments. This would lead to considerable ease for those working from home and otherwise promote digital payments in the country.

Regarding commerce and trade, nothing is more important than to find ways to keep physical movement of goods from ports and other borders. Imaginative ways have to be found to allow movement of exports across land routes presently closed. If our diplomatic intervention can help ward-off export order cancellation, such support should be provided to our exporters.

The government plans to reach out to some 12 million households and give them Rs12,000 for three months using the BISP data. This will cost Rs144 billion. It will then look for labourers who have lost jobs, and compensate them. For this purpose Rs200 billion have been kept. Finally, Rs50 billion is provided for cheaper supplies at the Utility Stores. This approach would dissipate fire-power and lead to poor targeting.

At the very outset, it must be recognized that nothing other than simple cash-transfer would work as an efficient instrument of income support. Distributing rations at doorsteps, or lowering prices at Utility Stores etc would all entail phenomenal logistical challenges, duplication and poor targeting. They may serve as good screen shots on TV but will have only a limited effectiveness. Above all, they would lead to significant leakages and pilferage. Also, cash-transfer would save governments the trouble of forming volunteer forces which have already attracted accusations of politicization.

A successful cash-transfer programme would require full coordination between federal and provincial governments. It is not unfathomable to form an inter-provincial coordination committee that would agree on a basis for targeting, particularly when it is based on NADRA data and electoral rolls. Pakistan has one of the best citizens registration data-bases which has yet to be fully leveraged.

Tele-density is nearly 80 percent so we have a high connectivity. The financial sector under the National Finance Inclusion Strategy (NFIS) is making rapid progress. BISP distribution is fully automated. Of course, a mechanism to resolve data discrepancy or deficiency has to be part and parcel of the system.

Having argued for a cash-transfer strategy in sync across all governments, we now advocate for a more meaningful package than presently contemplated. A decent package would be Rs20,000 per month for three months. The size of households remains 12 million. The total cost of the package would be Rs720 billion, which is 1.6 percent of GDP.

The sharing between federal and provincial governments would be 65:35. This means that the federal government would pay Rs468 billion and the provincial government Rs252 billion. Inter-provincial distribution would be in line with population ratios. The programme would be equitably shared and distributed across the country. While cash is there, availability of goods could become an issue. This should then be the responsibility of district administration, law-enforcement agencies and the armed forces. It would be necessary, therefore, to spare these bodies from the duty to make ration packets and distribute them to people.

Finally, the SME package of Rs100 billion is perhaps the most significant for the revival of a sector which is most labor intensive. No strategy for its use has been notified. We suggest that the government bring together the SBP, banks/DFIs and SME association to design such a strategy. Two fundamental principles may guide this strategy.

First, the support from this fund would be made to mitigate financing cost on SME, either through outright grants or interest-free loans. Second, there would be a condition on the SME that it would maintain the same level of labor employment that was before the Pandemic, duly proved through authentic records.

The writer is a former finance secretary. Email: [email protected]