There is nothing more important today than the lives of Pakistanis and survival of businesses. Helping them should be the clearly stated goal of the coming budget. Putting the effect of the Covid-19 pandemic behind us as soon as possible will enable the economy to recover quickly.
At my Institute’s recent online seminar, I urged that the budget must send the signal of a government that cares. It should serve as a clear and unambiguous response to the pandemic. I listed three goals for the budget. First, it must allocate funds to protect health workers, for testing and tracing and for treatment. Second, it must help those who have lost jobs. Already, poverty in Pakistan was high. Job losses could send that number to a socially unsustainable level. Even if we lift the lockdown, demand will not revive at once. Direct transfers must still continue.
Third, it must keep the economy alive. The government and the SBP must ensure low cost credit to businesses, generously without conditions. We must avoid bankruptcies and minimize job loss at all costs. The budget must especially reach out to the informal and micro businesses. We have to prevent them from collapsing under the weight of the recession. They have a large share in our economy and employ a large number of people.
I view the pandemic as a wakeup call for the country to correct many years of wrong. For decades, our economic policy has left behind the majority of Pakistanis. By skimping on its obligation, the state has denied the bulk of its citizens the opportunity to grow and better their lives. Countries that have come out best from the virus’ challenge are those that put the interest of people above all else.
But they could do so only because over decades they have built an effective delivery system for social services. This also helped them combat the pandemic. That is how South Korea, Taiwan, and China have emerged without deep scars from the pandemic. That is why many other parts of the world struggle. By framing the discussion as a contrast between authoritarian and democratic states, the West has deflected the discourse.
What the West is witnessing is the effect of decades of neoliberal policies that have enhanced inequalities and degraded social services. Compared to East Asia, their cost in human lives is high. And the IMF estimates that their economies may take long to recover. Of all the places in the world, the West is the first to see social unrest. We must avoid their mistakes.
This year’s budget will not be easy, and I do not envy the officials who are preparing it. It is being made in the shadow of many negative developments. We are at a worrying stage of the pandemic, with rapid rise in cases. In a few weeks, it will be impossible to ignore the crisis. Our economy, already in slowdown, is in recession. Foreign exchange is scarce. Exports are again falling, and the hot money left at the first hint of the recession. With large-scale job losses across the globe, workers’ remittances may take a hit also.
Also, while the government’s expenditure is growing, revenue is falling. Increase in expenditure is because of the welfare and health costs, but especially from continued rise in debt servicing. External debt servicing may plateau because of postponement in markup for a few months. It will grow again if we do not get more debt relief. Debt servicing on domestic debt may reduce next year. To manage the current account, the government must prioritize imports for businesses over those for consumption. The government must review federal and provincial PSDP and ADPs. It may put other projects on hold to spend more on health and services, and include labour intensive projects.
All this must happen within the IMF’s EFF targets. The IMF may relax some targets, but is not expected to do so by much.
Budget making would have been simpler if we had tackled the enduring issues faced by the economy. The first issue is the large amount of subsidies that the government must pay each year. The PSE blackhole needs to be fixed by either improving their performance or by privatizing them. Also, the government is saddled with many guarantees and concessions given to some sectors. Protection and concessions allow them to profit from surplus transfer of resources from consumers and taxpayers. We must now correct the policies. Subsidies take away large sums of money from the government’s scarce resources and raise the cost of doing business for other firms.
Secondly, this crisis has brought into ever more sharp relief the vast chasm in Pakistan’s social deficit. It is a political choice. Yet, it is a wound that is self-inflicting. It hurts the governing class as much as it affects the majority. Economic growth is not possible without quality human capital. Businesses cannot grow without the skills and the right people to build their companies. And thus, it sets in motion a cycle of low growth, low revenue, and low services.
The social deficit’s other more dire effect is the alienation of our youth. A large number of young people are out of the economic mainstream, because they have not had the opportunity to build their capabilities. If the health problem grows, the two together could cause social unrest. We must avoid that at all costs.
This dysfunctional system of social services has been called upon to combat the health crisis. Such a broken system cannot do the job. The budget must try to correct this situation.
My overall position on economic stability is that we have pursued it for decades with no success. We should now think in terms of growth and exports. Yet, there are IMF targets to meet and we must not renege on those commitments. For the coming year, we must balance between IMF targets and the health of Pakistanis. I am sure the government is in touch with the IMF to test their tolerance.
The PM is the first world leader to call for debt relief and a multilateral initiative. At present, a multilateral effort will not succeed without US support, which seems unlikely. Pakistan must also pursue bilaterally with the US and China. That has more chances of success, especially if accompanied by a growth plan. Reduction in debt servicing is critical to control the budget deficit and divert spending towards recovery.
After the crisis, the government must launch a revival plan. Macro stabilization is not an end in itself. It must stimulate GDP growth to improve living standards of the people.
I recommend two more policy measures. Gradually, we must stop external borrowing for budget support. Payment of interest on foreign loans sends our resources to other countries. Foreign loans must be acquired only to build exports that help repay loans. Also, it is critical that we encourage savings in Pakistan. The constant decline of savings rate is a huge concern.
(The writer is chair and CEO Institute for Policy Reforms, and a former commerce minister.)
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