Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

Two things are important about every economy that neither it ever stand as good as running governments claims nor it stand as bad as opposition says. The best barometer is its people that how they feel about economy.

Secondly in a country like Pakistan mixed with capitalistic and feudal structure mostly economic decisions are made in favor of its upper or elite class that hardly covers 1-5% of Population.

Thirdly politics is always aligned with economy of the country and they cannot be resolved till whole nation including government and opposition comes up with their joint efforts.

Now coming to Pakistan incidentally the Covid-19 health shock has brought Pakistan’s low growth economy to a sudden halt, necessitating a rewiring of the economy. Let us consider how much political capital and executive time is spent on debt-creating instruments – multi-lateral, bilateral and commercial financing, short-term investments in government paper, and oil on deferred payments followed by endless efforts to implement conditionalities of these loans. The answer is: a whole lot, with lesser focus on strategic thinking beyond reliance on debt instruments. This recognition is a starting point to realign policy with the following non-debt creating instruments, constructing the political and social capital desired to follow through, with a ring-fenced human resource for delivery.

Pakistan’s real GDP growth is estimated to have declined from 1.9 percent in FY19 to -1.5 percent in FY20. The first contraction in decades that reflects the effects of COVID-19 containment measures that followed monetary and fiscal tightening prior to the outbreak. This disrupted domestic supply and demand, as businesses were unable to operate and consumers curbed expenditures, which specifically affected services and industries. The services sector is estimated to have contracted, by over 1 percent, while industrial production is expected to have declined even more (now it has bit inched up), the agriculture sector, partially insulated from the effects of the containment measures, is estimated to have suffered from monsoon rains and locust attacks.

On the demand side, private consumption is estimated to have contracted in FY20, as households reduced consumption amid the lockdown and dimmer employment prospects. Similarly, with heightened uncertainty, disrupted supply chains and a global slowdown, investment is estimated to have fallen drastically. Exports and imports also shrank given weaknesses in global trade and domestic demand. In contrast, government consumption growth rose, reflecting the rollout of the fiscal stimulus package to cushion the effects of the pandemic.

Despite weak activity, consumer price inflation rose from an average of 6.8 percent in FY19 to 10.7 percent and finally 7.3% in FY20, due to surging food inflation, hikes in administered energy prices, and a weaker rupee, which depreciated 13.8 percent against the U.S. dollar in FY20. With elevated inflationary pressures, the policy rate was held at 13.25 percent from July to February but was subsequently lowered to 7.0 percent over the remainder of FY20 to support dwindling activity and as inflationary expectations fell amid the pandemic. The central bank also implemented multiple measures to provide liquidity support to firms. At end-FY20, the banking system remained well capitalized, though upticks in non-performing loans were beginning to erode capital buffers.

The current account deficit shrunk from 4.8 percent of GDP in FY19 to 1.1 percent of GDP in FY20, the narrowest since FY15, driven mainly by import values falling 19.3 percent. Total export values also contracted 7.5 percent due to weak global demand. Despite the global downturn, workers’ remittances increased relative to FY19, underpinning a wider income account surplus. Fourth, sustaining remittances with expected job losses abroad requires an unprecedented intervention to bring $5 billion to $10 billion of hawala/hundi money through legal channels.

Meanwhile, higher net foreign direct investment, and multilateral and bilateral disbursements, more than offset a decline in portfolio flows, leading to a larger financial account surplus. The balance of payments consequently swung to a surplus of 2.0 percent of GDP in FY20, and official foreign reserves increased to US$13.7 billion at end-June 2020, sufficient to finance 3.2 months of imports.

In FY20, the fiscal deficit narrowed to 8.1 percent of GDP from 9.0 percent in FY19. Total revenues rose to 15.3 percent of GDP due to higher non-tax revenue, as the central bank and the telecommunication authority repatriated large profits. Despite reforms, tax revenues slipped to 11.6 percent of GDP, with lower economic activity and larger tax expenditures. Expenditures rose mainly due to a fiscal stimulus package valued at around 2.9 percent of GDP, while the public debt, including guaranteed debt, increased to 93.0 percent of GDP by end-FY20.

Significant uncertainty over the evolution of the pandemic and availability of a vaccine, demand compression measures to curb imbalances, along with unfavorable external conditions, all weigh on the future outlook. Economic growth is projected to remain below potential, averaging 1.3 percent for FY21-22. This baseline projection, which is highly uncertain, is predicated on the absence of significant infection flare ups or subsequent waves that would require further widespread lockdowns.

The current account deficit is expected to widen to an average of 1.5 percent of GDP over FY21-22, with imports and exports gradually picking up as domestic demand and global conditions improve. The fiscal deficit is projected to narrow to 7.4 percent in FY22, with the resumption of fiscal consolidation and stronger revenues driven by recovering economic activity and structural reform dividends. Expenditures will remain substantial due to sizeable interest payments and defense expenditures, a rising salary and pension bill, and absorption of energy SOE guaranteed debt (Circular debt) by the government.

There are considerable downside risks to the outlook with the most significant being a resurgence of the COVID-19 infection, triggering a new wave of global and/or domestic lockdowns and further delaying the implementation of critical IMF-EFF structural reforms (stated to resume in H1-FY21). Locust attacks and heavy monsoon rains could lead to widespread crop damage, food insecurity and inflationary pressures.

Conclusively Livelihoods for households dependent primarily on agriculture and labor opportunities could also be negatively impacted. Finally, external financing risks could be compounded by difficulties in rolling-over bilateral debt from non-traditional donors and tighter international financing conditions. The Tax recovery would stand between Rs4-5 trillion instead of Rs 6-7 trillion. Circular debt that has inflated from Rs 1 trillion to Rs 2.2 trillion would further inflate. So Government and public all would remain in trouble in ending 2020 and coming 2021.This requires to come up with joint efforts of government and opposition with all other institutions to find their solutions.



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