Budget 2020-21: APCC approves development outlay of Rs1,319b

ISLAMABAD: The Annual Plan Coordination Committee (APCC) on Thursday approved national development outlay of Rs1,319 billion for next budget 2020-21 and recommended to National Economic Council (NEC) for launching Rs100 billion special programme to combat COVID-19 with cost sharing of 50:50 both by Centre and provinces.

Out of total national development outlay, the federal Public Sector Development Programme was envisaged at Rs536 billion and provincial development outlays at Rs783 billion in the next budget for 2020-21. Many ministries/divisions and provinces asked for increased allocations but the federal government apprised them about their resource constraints. However, the APCC recommended to the NEC for allocating Rs100 billion for launching special programme to combat COVID-19 pandemic with cost sharing of 50:50 percent by Centre and provinces. So, the government announced that the federal PSDP size at Rs630 billion for the next budget. The government allocated zero development funding for Earthquake Reconstruction and Rehabilitation Authority (ERRA). The government allocated Rs24 billion for PM’s discretionary funding on the name of Sustainable Development Goals (SDGs) achievement programme for next budget against revised estimates of Rs30 billion utilised in outgoing fiscal year. The government allocated Rs6 billion for up-gradation of Pakistan Railways’ Mainline (ML-1) under China Pakistan Economic Corridor (CPEC) against funding requirement of Rs14,210 billion.

A consultative meeting of Annual Plan Coordination Committee (APCC) was held in the Planning Commission on June 4, 2020. Deputy Chairman Planning Commission Jahanzeb Khan chaired the meeting. Federal Ministries, State Bank, Ministry of Finance, provincial and special area governments participated in the meeting. Secretary Ministry of Planning, Development and Special Initiatives said that APCC is a consultative body and macroeconomic and development framework will be subject to adjustment in the light of the recommendations of the APCC. Deputy Chairman highlighted the importance of finalising COVID-19 responsive Annual Plan. APCC was told that the economy was heading towards revival until beginning of the March 2020; however with emergence of COVID-19 pandemic economic landscape has changed. Before COVID-19, exchange rate stability, barring tax revenues overall fiscal performance was satisfactory, reserves were building up, current account deficit was reduced massively, inflation after peaking in January started deceleration, remittances were improving and QIM was going up with reduction in extent of contraction and IMF targets for 3 quarters were fully met.

Economic growth was set to rise over 3 percent but because of COVID-19 came down to negative 0.4 percent as industrial and services sector were badly affected. Pressure on government spending mounted, exports contracted in April 2020 but imports fell much more quickly.

Next year will be challenging too, but economy will learn to live with COVID-19 phenomenon and growth will improve to over 2 percent, with agriculture despite of locust attack impact will post positive growth and some revival is expected in the services sector.

Inflation will be in the lower single digit next year, and external account will be comfortably placed with lower current account deficit. However, exports and remittances are likely to face challenging global environment.

The major strategy for PSDP 2020-21 is focus on completion of ongoing projects; COVID-19 responsive development programme; more funds have been proposed for social sector compared to infrastructure than the past years and funding of only approved projects as per provision of Public Finance Management Act 2019.

In the water sector, large multipurpose dams particularly Diamir Bhasha, Mohmand, Dasu Dams and drainage projects have been proposed adequate funds. Small scale provincial nature dams and drainage projects for less developed districts have been proposed allocations.

Major ongoing projects of Railways including ML-1, Maritime Affairs Karachi Shipyard and Inter-provincial/ regional connectivity have been proposed financing. Similarly, major portion of western route has also been proposed funds. In the Energy Sector the focus remained on projects of power evacuation, expansion, improving transmission and distribution system to minimize line losses and circular debt. Projects for supply of power and gas to SEZs have also been proposed financing.

Health Sector is a priority in the wake of COVID-19 to provide improved health services, preventions and control of communicable diseases, production of medical devices and capacity enhancement of health institutions. The primary focus would be on strengthening promotive, preventing care and the public health and hygiene system with supporting community resilience in the country.

In the PSDP 2020-21, Out of total, 59 percent proposed allocation has been provided to Infrastructure, 35 percent to Social Sector, and the remaining 6 percent to other Sectors. For next year preference has been given in allocation of funds to Social Sector by proposing an allocation 35 percent (Rs185 billion) of PSDP compared to the financial year 2019-20 where this allocation was in the range of 16 percent. The hovernment has taken this step to improve the life of the common man by providing good health, education, clean environment, clean drinking water and improving overall life standards of the masses. The Transport & Communications sector has been proposed Rs159 billion, energy, Rs70 billion, water Rs64 billion, health & population Rs18 billion, education including HEC Rs34 billion, physical planning & housing Rs19 billion, SDGs Rs41 billion, Special areas (AJ&K , GB) Rs40 billion, and merged district of KP Rs40 billion. Under the special program for improving the quality of life of common people Rs100 billion have been proposed. The total proposed outlay of the PSDP 2020-21 is Rs630 billion.

According to macroeconomic framework approved by the APCC envisaged GDP growth rate at 2.3 percent and inflation at 6.5 percent for the next budget. It states that the economic landscape in the coming year again predominantly depends upon the control of the pandemic. Even if the lockdown is completely lifted before the commencement of next fiscal year, the second-round impact of Covid-19 will still mar the growth performance of the country. As the quarter long lockdown this year has severely affected GDP growth this year, a quick recovery is expected next year. The overall GDP growth is expected to pick up in 2020-21 while rehabilitation and recovery of industrial and services sectors will boost the growth prospects. Monetary easing and debt relief will also improve fiscal position. Inflation is expected to remain in single digit and external sector will also be improved due to resumption of remittances inflow and better exports performance.

The Annual Plan 2020-21 envisages overall macroeconomic stability in view of fiscal consolidation, improving external account and revival in agriculture and industrial growth. The GDP growth for 2020-21 is targeted at 2.3 percent with contributions from agriculture (2.9 percent), industry (0.1 percent) and services (2.8 percent). The growth targets are subject to favourable weather conditions, post Covid-19 economic recovery, managing current account deficit, consistent economic policies and aligned monetary and fiscal policies.

20. Agriculture Sector: Agriculture sector is targeted to grow by 2.9 percent on the basis of expected contributions of important crops (2.2 percent), other crops (2.1 percent), cotton ginned (1.3 percent), livestock (3.5 percent), fisheries (2.1 percent) and forestry (1.5 percent) [Annexure–I]. The production targets for important crops such as wheat and cotton are expected to be met given that the quality and quantity of agriculture inputs is ensured and all-encompassing agriculture package is given to farmers. Moreover, consistent availability of water, certified seeds, fertilizers, pesticides and agriculture credit facilities will help to achieve the targeted growth.

21. Industrial Sector: Industrial sector is targeted to grow by 0.1 percent during 2020-21. Manufacturing sector is targeted to contract by 0.7 percent based upon LSM contraction of 2.5 percent, and small scale & household manufacturing sector growth of 6.0 percent. Moreover, construction and electricity generation & gas distribution are targeted to grow by 1.4 percent and 3.5 percent, respectively. Mining and Quarrying sector is projected to grow by 0.5 percent. Industry is expected to pick up pace in 2020-21 with the implementation of envisaged export promotion and industrial development measures. Prime Minister’s special package for Construction sector is expected to play a significant role in accelerating growth in construction and allied industries. Industrial sector recovery from contraction will be interrupted in the coming few months because of risk aversion tendencies of the citizens and lack of mobility of labor. Automobile sector, that is already facing impact of demand compression, will also face supply side constraints in the shape of closure of its downstream industry and imported intermediate goods. Despite revival of industrial sector growth, LSM is not likely to post positive growth.

22. Services Sector is targeted to grow by 2.8 percent in 2020-21, supported by growth of 1.4 percent in wholesale & retail trade, 1.5 percent in transport, storage & communication, 3.4 percent in finance & insurance, 4.0 percent in housing, 4.6 percent in general government services and 4.2 percent in other private services. The expected revival in commodity producing sectors will complement the targeted growth in services sector.

Fiscal Policy: Fiscal policy during 2020-21 envisages containing fiscal deficit, additional resource mobilisation, controlling current spending and switching to targeted subsidies while prioritizing development spending.

Monetary Policy: The balanced monetary policy is aimed at supporting adjustment process to restore macroeconomic stability and manage aggregate demand. However, the challenge would be to strike a balance between growth and stability in such a way that monetary policy tools many not suffocate economic growth while containing inflationary pressure.

Inflation: Average inflation during 2020-21 is projected at 6.5 percent on the basis of subdued demand and suppressed commodity prices in the international markets and second round effect of COVID-19 related economic implications.

Balance of Payments: Expectation of resurgence of global commodity demand in 2020-21 and revival of economic activity after deadly pandemic is a positive signal for exporters. However, global demand will be lower than pre-COVID period and Pakistan’s exporters will be facing challenging domestic and external environment. Import demand, despite fall in crude oil prices, is likely to increase marginally but exports pick-up will not be able to neutralize it. Resultantly, trade deficit is projected at 7.1 percent of GDP. Current account deficit is projected to be at 1.6 percent of GDP in 2020-21with projected growth of exports and imports of 1.5 % and 1.1 percent.