Thursday May 23, 2024

Covid-19 and the economy

By Mohammad Zubair
April 29, 2020

For the first 19 months of the current government's tenure, economic failures were all attributed to the previous PML-N government or the mess of the last 70 years. In the next 40 months, it will be the coronavirus that will be held responsible for all the economic mess. No ownership by the present government and no responsibility of their decisions.

One thing is for sure though; the five-year period will end with no success stories and nothing to talk about in terms of economic delivery. We have kept hearing about the reasons for failure since the PTI has come into power and by now we are accustomed to this style of politics from the party's leadership.

No doubt there are very serious economic implications resulting from the novel coronavirus. This is true not just for Pakistan but the entire world. According to the World Bank and the IMF, Pakistan’s economic growth is projected to be minus 1.5 percent.

But is this negative growth all due to the impact of Covid-19 or is there more to it? In order to better understand, we need to separate the ongoing fiscal year into two parts – the first nine months between July 2019 and March 2020, and the second one between April 2020 and June 2020. It is fair to say that the first period of nine months was without any negative pandemic impact. So let’s review the performance of the government in the first nine months of the fiscal year. It will be clear from the financial numbers of the first nine months that the economy was already in a meltdown situation. Industry was showing negative growth and agriculture was also expected to be in the negative at the end of the fiscal year. Only the services sector would have ended with some growth.

So Pakistan’s overall GDP growth was already going to be around two percent or even less. All independent economists were clear on this – much before the pandemic hit us. A growth rate of two percent or less has rarely been witnessed in Pakistan’s history. And along with low growth, we also faced double-digit inflation in the first nine months. The double-digit inflation trend was to continue for the full fiscal year – a lethal combination of extremely low growth and double-digit inflation that was pushing millions of Pakistanis below the poverty line and creating unemployment on a massive scale.

This was the state of Pakistan’s economy much before the pandemic hit us (how poorly we have handled that is another subject).

Let’s look at some of the other economic indicators for the period July 2019-March 2020.

Tax revenue is one of the most important indicators and reflects the overall direction of the economy. The original tax revenue target was set at Rs5.503 trillion. That was set at the time the budget was presented in June 2019, reflecting an increase of almost 40 percent over the previous fiscal year. In an economy that was not expected to grow, setting such a target was not just ambitious but outright incompetent.

Almost every independent economist and opposition politician rejected the tax revenue target. There was unanimity that we will miss the target by almost 600-700 billion. A few months into the fiscal year, the tax revenue target was significantly reduced to Rs5.270 trillion. As the monthly numbers were coming, even the revised target looked completely out of reach. For reasons beyond our understanding, the revised target was not changed till March end even though it was clear that the revised target would be missed by around 800-900 billion. This can be verified by the fact that at March end, actual collection was only Rs3063 billion – short by Rs458 billion from the revised target.

Based on the first nine months performance, we would have reached around Rs4200 billion over the full fiscal year. With the additional impact of the coronavirus, now the estimate is Rs3.9 trillion.

The shortfall in tax revenue has a direct consequence on fiscal deficit. When the budget was presented in June last year, fiscal deficit was estimated at Rs3200 billion – 7.2 percent of GDP. This was based on tax revenue estimate of Rs5.5 trillion. As mentioned above, by March end revenue estimate had come down to Rs4400 billion for the full year. Accordingly, the fiscal deficit was revised upwards to Rs4300 billion (almost doubling within two years of the PTI government). This would have meant a fiscal deficit of over nine percent – never seen in our history. And this was without any pandemic impact. How much the expenditure would have gone over the budget estimates is still not known but certainly it would have added to the fiscal disaster that was already looming large.

Exports is another major area that will be badly affected by the novel coronavirus due to economic contraction around the globe. However, we were already struggling to increase our exports since the present government came into power. The first year was flat (after 13 percent growth during the last year of the PML-N tenure) while export growth for the first nine months of this fiscal year remained abysmally low reflecting growth of just one percent. The last three months will have a further deteriorating impact due to Covid-19 but we were nowhere in terms of reaching a fairly easy target of $25 billion.

No doubt the actual performance for the first nine months was extremely poor, but what does it say about the planning process in this government. Governments do set ambitious targets that lead to slippages but in the past the shortfalls have been reasonable and for valid reasons. Setting a revenue target of Rs5.5 trillion and ending with less than four trillion or setting a fiscal deficit target of less than seven percent in the last fiscal and ending at 8.9 percent is unexplainable.

The Covid-19 pandemic will now be blamed for our economic misery but, as we have seen, we were already in a meltdown situation before it hit us. The damage had been done on a sustained basis from August 2018 up until March 2020. We will face far more devastating economic consequences due to the coronavirus because our economy was already badly bleeding. Back in February/March, the economic disaster was looming large. Had we remained on a growth trajectory with low inflation, as was the case before August 2018, we would have been better prepared to manage this new crisis. Not much can or should be expected from the government in the present challenging environment when it could not deliver even under normal circumstances.

The writer is former governor Sindh and former minister for privatisation.