Trying to cope with fragile economic recovery
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.