Try­ing to cope with frag­ile eco­nomic re­cov­ery

The Pak Banker - - Editorial - .M. Sharif

One of the grave chal­lenges un­cov­ered by the re­cent floods is to keep the frag­ile eco­nomic re­cov­ery on track in the midst of mul­ti­di­men­sional fis­cal de­mands that need to be pri­ori­tised care­fully to ad­dress the colos­sal task of re­ha­bil­i­tat­ing 20 mil­lion peo­ple. Ini­tial es­ti­mates per­tain­ing to the losses car­ried out by US Ball State Uni­ver­sity Cen­ter for Busi­ness and Eco­nomic Re­search (CBER) are stated to be around $7-8 bil­lion. It is likely to in­crease as the tragedy is still un­fold­ing and the dam­age could be more than $15 bil­lion.

The govern­ment needs around $3 to $4 bil­lion or Rs300 bil­lion to kick start the rehabilitation process. It can not de­pend wholly upon fi­nan­cial help from the in­ter­na­tional com­mu­nity only that at best would be be­tween $1.0 to $1.5 bil­lion. It has limited op­tions for cre­at­ing fis­cal space by ei­ther bor­row­ing from mul­ti­lat­eral in­sti­tu­tions or mo­bil­is­ing do­mes­tic fi­nan­cial re­sources by im­pos­ing di­rect taxes on se­lected items con­sumed by af­flu­ent seg­ments of the so­ci­ety. In ei­ther sit­u­a­tion, the fo­cus should be on keep­ing the eco­nomic re­cov­ery on track. The fed­eral fi­nance min­is­ter prior to meet­ing In­ter­na­tional Mon­e­tary Fund (IMF) of­fi­cials in Washington in view of the fifth eco­nomic re­view said, "We want to re­main on track with the IMF pro­gram be­cause that is a re­form pro­gram that we our­selves are tak­ing." He fur­ther stated that we were will­ing to take tough de­ci­sions. He looks for­ward to "eas­ing re­stric­tions on the $11 bil­lion loan pro­gram ap­proved for Pak­istan in 2008" in or­der to get more fis­cal space to meet emer­gency needs.

The govern­ment wants to con­vince the IMF to re­lease the two re­main­ing in­stall­ments $1.3 bil­lion each of the on­go­ing stand-by ar­range­ment (SBA) pro­gramme in one-go. Bud­getary ob­jec­tives for cur­rent fis­cal year aimed at con­sol­i­dat­ing macroe­co­nomic sta­bil­ity, re­duc­ing in­fla­tion, achiev­ing sel­f­re­liance, pro­vid­ing so­cial pro­tec­tion to the vul­ner­a­ble seg­ments and in­creas­ing em­ploy­ment. Con­sol­i­da­tion of macroe­co­nomic sta­bil­ity was to be achieved by re­duc­ing fis­cal deficit from 6.2 per cent to 4.0 per cent, in­fla­tion to 9.5, en­hanc­ing tax rev­enue col­lec­tion from Rs1.330 tril­lion to Rs1.778 tril­lion and in­creas­ing eco­nomic growth to 4.5 per cent. All these tar­gets now seem far fetched as the floods have com­pounded the coun­try's eco­nomic woes. Seek­ing sup­port of donors has now be­come quin­tes­sen­tial.

Ac­cord­ing to the Fund's deputy di­rec­tor, "The floods have caused se­ri­ous dam­age to in­fra­struc­ture and changed the eco­nomic and fis­cal out­look. IMF is as­sess­ing the im­pact on the bud­get, growth and in­fla­tion and what the ap­pro­pri­ate re­sponse would be in that con­text. The same mes­sage ap­plies to the is­sue of con­di­tion­al­ity. There is also the pos­si­bil­ity of pro­vid­ing fi­nanc­ing through an emer­gency in­stru­ment for nat­u­ral dis­as­ters that has been used in the past for coun­tries fac­ing the con­se­quences of this kind of event. The Fund is work­ing with vis­it­ing Pak­istani of­fi­cials on mea­sures that would help Pak­istan re­cover from this tragedy whilst keep­ing its econ­omy on the path for sus­tain­able growth. These tragic floods will have a ma­jor im­pact on the coun­try's econ­omy, and the scale of the im­pact means that the coun­try's bud­get and macroe­co­nomic prospects will need to be re­viewed."

Prior to floods the coun­try's eco­nomic man­age­ment was se­ri­ously con­strained as re­flected by the bud­get in­come-ex­pen­di­ture lay­out. The govern­ment had planned to bor­row Rs685 bil­lion in­clud­ing ex­ter­nal bor­row­ing of Rs387 bil­lion and the prov­inces were to con­trib­ute Rs167 bil­lion (1.0 per cent of GDP) to keep the fis­cal deficit at 4.0 per cent. The fi­nan­cial re­quire­ments have now changed these fig­ures and the govern­ment is likely to re­view them with the sup­port of IMF of­fi­cials.

To be­gin with, debt ser­vic­ing pro­jected at Rs873 bil­lion could be re­vised up­wards as the cur­rent regime is ex­pected to bor­row ex­ten­sively to meet the mount­ing needs of the flood-af­fected ar­eas and peo­ple. Food in­fla­tion has al­ready surged and would im­pact the over­all in­fla­tion and its pro­jected tar­get will be al­tered. Ex­ports could re­duce by around $2.0 to $3.0 bil­lion and cause larg- er trade and cur­rent ac­count deficits than pre­dicted. The Fed­eral Board of Rev­enue (FBR) al­ready skep­ti­cal about achiev­ing Rs1.778 tril­lion in tax rev­enue would have to re­view its tar­get. The fis­cal deficit is widely be­lieved to shoot up to 7-8 per cent of the GDP as against 6.2 per cent for last fis­cal year. Such a pre­car­i­ous eco­nomic sce­nario is likely to cre­ate an in­aus­pi­cious en­vi­ron­ment for re­cov­ery to take place in the next 2-3 years and the tar­gets (5.5 per cent GDP growth, 7.0 per cent in­fla­tion and 3.2 per cent fis­cal deficit) laid down for the Medium Term Bud­getary Frame­work (MTBF) (FYs 11-13) would be ad­versely im­pacted.

It is crit­i­cal that the govern­ment takes un­wa­ver­ing en­deav­ours in mo­bil­is­ing the do­mes­tic fi­nan­cial re­sources, makes best use of fi­nan­cial as­sis­tance pro­vided by for­eign coun­tries through a trans­par­ent mech­a­nism and re­lo­cates fis­cal ex­pen­di­tures in ac­cor­dance with the re­vised eco­nomic pri­or­i­ties in co­op­er­a­tion with the pro­vin­cial gov­ern­ments. It also needs to take strong ad­min­is­tra­tive mea­sures to keep prof­i­teers and mar­ket ma­nip­u­la­tors in check, im­prove sup­ply side of the econ­omy and ef­fec­tively monitor rehabilitation work to achieve the de­sired goals within 2-3 years. These mea­sures are es­sen­tial to achieve a sus­tain­able macroe­co­nomic re­cov­ery. The govern­ment has a few vi­able op­tions in this re­spect. Firstly, all pos­si­ble mea­sures should be taken to en­able the FBR to meet the an­nual rev­enue tar­get of Rs1.778 tril­lion. It should be pos­si­ble by re­duc­ing the scale of cor­rup­tion. Al­lo­ca­tion of funds par­tic­u­larly with ref­er­ence to cur­rent ex­pen­di­tures es­ti­mated at Rs1,998 bil­lion (72.0 per cent of the to­tal bud­getary out­lay), Pub­lic Sec­tor Devel­op­ment Pro­gramme (PSDP) of Rs663 bil­lion with fed­eral and pro­vin­cial shares of Rs290 bil­lion and Rs373 bil­lion re­spec­tively and Rs124 bil­lion ear­marked for other devel­op­ment ex­pen­di­tures that in­clude Rs50 bil­lion for Be­nazir In­come Sup­port Pro­gramme (BISP) and Rs40 bil­lion for the in­ter­nally dis­placed per­sons (IDPs) should be re­viewed for re­duc­ing or di­vert­ing part of them to­wards re­lief and rehabilitation.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.