Pakistan’s Economic Struggles Amid COVID19

Pakistan is reeling under the impact of twin challenges; i.e., the covid19 pandemic and steep economic distress. This has come during one of the worst phases of the country. Pakistan had already been reeling under severe economic crisis due to the conditions imposed by the International Monetary Fund (IMF), when it released a US$ 6 billion bailout package. In last year’s budget, Pakistan had aimed for a primary deficit of 0.6 percent of GDP. This was supposed to be supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments and improve tax administration.

Pakistan has repeatedly struggled with generating tax revenue. The IMF bailout package was to improve public finances and reduce public debt through tax policy and administrative reforms, and ensure a more equal and transparent distribution of the tax burden.

While releasing the first instalment of the bailout, IMF had said that a plan for “cost-recovery in Pakistan’s energy sectors and state-owned enterprises” would help reduce “the quasi-fiscal deficit that drains scarce government resources.” This, however had led to significant increase in the cost of petroleum products and electricity charges in the country.

The IMF bailout had led to protracted political acrimony in the country. There was all-round increase in prices of essential commodities. At the beginning of this year, Pakistan saw the emergence of the first cases of coronavirus. Presently, more than 110,000 Pakistanis have tested positive, with about 35,000 recoveries and 2216 fatalities. The covid19 pandemic has taken a huge toll on the country’s economic resources.

In the midst of this, IMF has suddenly asked Pakistan to ‘freeze’ salaries of its government employees. However, Islamabad has said it would not cut the salaries of government employees as it is necessary to protect government employees and pensioners from inflation.

Pakistan is expected to present its budget on June 12. The Imran Khan government is struggling to strike a balance between continuing with the fiscal consolidation and providing an impetus to economic growth. It has been further revealed that the US$ 6 billion “expansion fund facility” of the IMF programme will be restored when the government presents the next budget in accordance with the IMF Macroeconomic Framework.

The IMF has repeatedly urged Pakistan adhere to the fiscal consolidation path due to a high and unsustainable public debt that is set to hit 90 per cent of the total value of national economy by showing a nominal primary deficit in the new budget.

For common Pakistanis, this fiscal year was the worst year as they witnessed highest inflation in the world forcing policy makers to increase interest rate, according to the State Bank of Pakistan (SBP). "Pakistan witnessed highest inflation not only in comparison with the developed economies but also with emerging economies," said the Inflation Monitor for April issued by the SBP

The SBP had hiked interest rates to cool down inflationary pressure during the year but high rates proved counter-productive as it further increased inflation while the private sector stopped borrowing costly money hampering industrial growth and services. January 2020 witnessed a 12-year high inflation of 14.6 per cent. In response to the rising prices, the SBP had hiked interest rates to 13.25 per cent.

However, the coronavirus pandemic has led to contraction of demand. The country’s leading bank was forced to cut interest rates by a whopping 8%. The rate cut announcement came as inflation slowed down, falling to 8.2 per cent in May, much lower than the SBP projections for the month.

The July-May inflation for the current fiscal year slipped below to the State Bank of Pakistan’s earlier projection to 10.94 per cent. The number is expected to drop further. Pakistan has slashed prices of petroleum products (thrice during the two months), which drastically reduced the cost of production, transportation and finally reduced inflation.

How Pakistan manages its economy in the post corona scenario remains to be seen. The country’s leading bank had announced series of measures to deal with economic slowdown during the lockdown period. Whether these had the approval of the IMF is not known. The going could get tough for Islamabad.

Script: Kaushik Roy, AIR: News Analyst