- A bigger stimulus package is needed
Pakistan’s economic team seems to be constantly behind the curve. Judging by the severity of the crisis, the initial support and stimulus package of Rs 1.2 trillion is proving to be totally inadequate. It is spread rather thinly across 12 different items, and in relative terms is equal to only 0.4 per cent of GDP, so that its stimulus impact is likely to be neither here nor there. The promised relief is not being delivered to the people quickly enough because of a string of bureaucratic hurdles and cumbersome ‘means’ test rules. One example is the Ehsas programme. An article in the press has laid bare the shocking mishandling of this programme and given constructive suggestions on what could be done to speed it up.
A problem with our current policy is that it is too uncertain. We don’t know from one day to another whether we are in a total lockdown, partial lockdown or some hybrid, which is one of the major reasons for poor compliance. SOPs seem to have taken the place of clear policy statements.
The experience of other countries tells us two things; that delay and dither can be seriously costly and that it is not a binary choice between life and livelihood. We can do both: protect life and livelihood simultaneously. The first by enforcing lockdowns and the second, by using the resources that we have been given recently to come up with a substantial new support and stimulus package that could offer relief to the poor, jobless and SMEs.
It is worth noting that the government has just been given nearly $4 billion by the multilateral development institutions, specifically for the purpose of dealing with the devastating economic and social effects of corona pandemic. In terms of breakdown: the IMF has given $1.4 billion, the World Bank $1 billion and the ADB $1.5 billion, with an understanding that additional funds could be made available if needed.
With the resources we have, as well as resources we have been given by the international community, we can meet the challenge of both saving lives and livelihoods, if we can only organize ourselves better, and ensure that the crisis does not spin out of control, which it threatens to
It is also important to note that IMF financing via its ‘rapid investment facility” (RIF) is in the form of quick disbursing loans, which carry no conditionality and so can be deployed without further delay. Pakistan has also been given debt relief by Paris Club countries for one year, that is, to mid-2021 with the possibility of extending it to 2022. Such relief has been given to nearly 70 other countries, primarily as a result of strong lobbying efforts by the IMF and World Bank in Washington DC. It is suggested that Paris Club debt relief could contribute another $1.2 billion to the exchequer, which would raise the total funds available to $5.2 billion.
Further, with the collapse of oil prices in world markets, the government could count on substantial additional revenue. Against these pluses, we have to take into account some minuses. These include some reduction in remittances, the negative effect of hot money outflows on reserves and the exchange rate, and the virtual closure of our export markets with a drop in our export receipts.
Given that the IMF programme negotiated last year is on the ventilator, the economic team must produce a policy paper giving a clear road map on the government’s policy priorities for the next 6 to 12 months and how the resources at its disposal will be deployed. This is even more important now than at any time before, because the budget has been postponed indefinitely and we are living under high uncertainty.
According to recent IMF forecasts, South Asian economies would experience a GDP contraction of between -1.00 to -2.00 percent in 2020-21. As the Pakistani economy is much weaker than any of the others, the contraction would be much sharper: -2.5 to -4.5 percent have been mentioned. This means that the stimulus required would need to be at least twice to thrice the previous one, when growth was forecast at +1.5 to +2.0 percent.
The SBP has taken a number of positive actions. The cut in interest rates to 9 percent was the most significant, along with other measures to support employment and provide credit lines to companies, particularly SMEs. However, what the SBP can do through monetary easing is limited and very rarely reaches the poor.
Given the size of the economic shock, and the assumption that the current crisis could last for at least six months, it has been suggested that a new stimulus package would need to be in the range of Rs 3-4 trillion. This is equivalent to about 1.0 to 1.5 percent of GDP. The Prime Minister keeps suggesting that we don’t have the resources for dealing with the coronavirus. This is patently incorrect and not based on any serious economic or scientific assessment. Below are some facts and figures.
First, it is expected that the budget deficit this year would climb to about 10.5 percent of GDP. An enhanced support package of Rs 3-4 trillion would add another 1-1.5 percent to this.
How will this be financed? The government has already received nearly $5.2 billion from international financial institutions and Paris Club countries. There is also money lying idle in the Dam Fund, which could be put to good use at this time.
The interest rate cut will also help greatly reduce pressure on budget deficit and release additional resources. A simple rule of thumb is that if the interest rate of interest falls by 1 per cent, the budget deficit improves by 1 percentage point times the country’s debt to GDP ratio. Given that the debt-to-GDP ratio in Pakistan is about 82 per cent, this would mean the impact of a one percentage point fall in interest rate would be equivalent to a cut in interest cost of about 0.82 per cent of GDP in the long run, and about 0.41 per cent GDP in the short run.
Thus, as a result of a reduction in interest rate of 4.25 per cent, (from 13.25 to 9 pc) over the last six months, we would expect a 1.75 percentage point turn-around in budget deficit─ sufficient on its own to finance the entire cost of an enhanced support and stimulus package.
In times of crisis such as this one we would expect budget deficits and debt levels to rise substantially, as part of Keynesian anti-cyclical measures. Even a conservative institution like thr IMF has come out in favour of running up large deficits to keep the economy afloat, on the ground that if you do nothing to stimulate the economy it would collapse and you would be lumbered with even higher levels of deficits and debt.
This above is meant to show that with the resources we have, as well as resources we have been given by the international community, we can meet the challenge of both saving lives and livelihoods, if we can only organize ourselves better, and ensure that the crisis does not spin out of control, which it threatens to. We are fortunate to have someone as experienced as Hafeez Shaikh at the helm of finance at this time, and we trust he will be given the authority to steer the country out of this economic morass.
