A Federal Budget in the times of pandemic


For several decades now, people have been hearing the same narrative: “Pakistan’s economy is in dire straits and exceptional initiatives are needed to deal with the situation”. However, the situation has worsened during these decades instead of getting better.
The average growth rate in the 2000-2010 decade remained 4.3% and it is expected to decline to 3.8% in 2011-2020. In the last 10 years, the budget deficit remained 4% to 6 % of GDP due to substantially less expansion in tax revenues compared to rise in expenditures, significant increase in non-development expenditures and burden of high loans.
Irrespective of the claims by incumbent governments, the limitations of budget-making authorities have become very obvious in the last few years. The limitations are: no fiscal space for the government to plan some extraordinary measures after taking care of inevitable current expenditures, and therefore budget-making and passing process becomes a mere constitutional tradition. Total expenditures in FY 2018-19 were Rs6419 billion, however the total revenues remained at Rs5062 billion. This means that the total income is even not sufficient to fulfill the non-development or current expenditures.
A look at the performance of the incumbent federal government’s two years in office reveals just additions to the drastic economic situation.
The effects of COVID-19 have added to the misery of an already depressed economy. However, there are hidden opportunities in every problem and therefore Budget 2020-21 should be taken as a starting point for vital decisions on a roadmap for economic prosperity.
The pandemic has provided relief to government in various aspects. There has been reprieve in the form of international aid and loans from IMF worth $1.386 billion while all expenditures by government related to COVID-19 will be excluded from EFF agreement of 39 months. ADB has provided a loan of $305 million besides $200 million by World Bank to deal with the pandemic. In addition, around $12 billion in repayments have been rescheduled to 2022 by the G20 countries. The significant drop in international oil prices and decline in domestic demand have relieved pressure on balance of payments and hence decline in import bill. Therefore, after a long time, the government is presenting a budget when it has no significant compulsions in the domains of debt payments and balance of payments.
The budget-making process is an inevitable activity and constitutional compulsion. In this regard, it would be fitting to recommend lowering of non-development expenditures and rationalization of tax collection mechanism. More importantly, it is necessary to ponder upon the opportunities in the domains of societal priorities, needs and economic activity.
The Institute of Policy Studies has put forth some recommendations in the context of Budget 2020-21 while focusing on the current economic conditions and issues resulting from the pandemic. These highlight food security, social and health security, energy security, industry sector, services sector, tax collection system and governance issues.
Food Security
The outbreak of COVID-19 has endorsed the significance of food security, specifically in times of pandemics. Therefore, the agriculture sector becomes the priority area when discussing food security. In this domain, designing a two-tier policy of immediate steps and long-term initiatives that not only cater to the food needs of increasing population but also enhance the export of food items becomes all the more important. On the other hand, the agriculture sector is also significant while considering employment opportunities for a large section of the country’s population.
As such what is required is a robust and effective policy to enhance the production of food crops (wheat, rice, corn and sugarcane) to fulfill the domestic needs and exports. Import of food crops needs to be discouraged while encouraging import of those crops that act as raw material for national industry. It is also recommended to ban import of food items prepared from non-natural ingredients.
Livestock is the biggest subsector of agriculture having a share of 60.54% and contributing 11.22% to the country’s GDP, which amounted to Rs1440 billion in 2018-19. Livestock exports are 3.1% of the total and provide livelihood to around four million of the rural population. However, before devising any policy, a detailed livestock census should be conducted since all the relevant data is based on estimated figures of surveys of 1996 and 2006. Small-scale farmers and unemployed rural families should be supported at government level to start livestock farming by following advanced technologies.
Fisheries is providing livelihood to the population living in the coastal areas of the country and contributing significantly to exports, Rs39 billion in FY 2018-19. Small fishermen should be given the status of SMEs and provided financial and technological aid by planning joint programs of SMEDA and financial institutions of the country. Besides, advanced fish farming techniques should be taken up at government level by initiating the project in specific areas of the country.
One of the alarming issues in agriculture is post-harvest food loss and an ADB report estimates that the country could save almost $1 billion by tackling only 75% of the problem. In this regard, entrepreneurial training programs need to be initiated for local youth in which they are imparted skills in food processing and packing. Banks and financial institutions should be encouraged to finance the projects, which would not only bring employment but enhance the business skills of youth.
The barren and unutilized agriculture lands of the country should be allotted on easy long-term lease plans to graduates of agriculture universities. This step will help in improvement of agricultural production and increase in employment. Along with that kitchen or rooftop gardening in urban areas needs to be encouraged.
The import of edible oil is a significant burden on the import bill. It imported $1.767 billion of edible oil in FY19, which is 37% of total food imports. Enhancing the production of edible oil-rich crops by providing financial and technological incentives to farmer will help in saving foreign reserves and increase in viability of food security.
The Plant Protection Department is dormant since almost two decades. It needs to be reinstated in its true spirit for controlling locust attacks in future.
It is also a significant point to ponder that why locust attacks have become so severe. The widespread commercial use of hybrid seeds may possibly be the reason in addition to environmental issues. In this regard, indigenous research needs to be conducted.
Social Security
Health Sector: Health is the second sector whose vulnerabilities and shortcomings have been exposed during this pandemic. The issues of both quantity and quality should be taken care of in this sector. In public domain there are 1,279 small and big hospitals, 5,671 dispensaries, 747 child and maternity centers, total beds in all hospitals and dispensaries are 132,227. The focus should be on orthodox and conventional means of treatment and promotion of curative rather than preventive means. Other means of medicines and treatments claim to be more effective than allopathic and therefore resources should be utilized for research in this domain.
Volunteer Sector: Charity and volunteerism have emerged as an internal strength of Pakistan’s society on which the nation should be built. Legislation is required to enhance the behavior and trends of organized volunteerism while strict filter and controls need to be implemented on funding coming from abroad that may influence the sector negatively.
The system of zakat and usher is an extraordinary one that requires more emphasis. The severity of the system’s breakdown can be gauged from the fact that zakat funds collected at zakat institutes go to waste and a big chunk is used on organizational matters. Various researchers have calculated the potential in the domains of zakat, usher and other charity, and believe that the social security system could be run solely on these funds if managed properly.
Energy Security
The energy security has an inevitable role in running of businesses and industry. However, looking at the energy mix of the country, a large portion is still obtained from oil and related items, which is not only adding burden on the import bill but also on consumers.
Packages to encourage and take advantage of utilizing energy through renewable energy sources (solar, wind, etc.) may be linked with incentivized construction sector. Similarly, factory and mill owners should also be encouraged on the same lines and incentives may include subsidy in utility bills and income tax.
The benefits of low international oil prices could not be availed by Pakistan due to storage issue. The government should go for forward contracts of oil on current prices and ask oil-rich friendly countries for deferred payment of one year. This will reduce burden on import bill.
There is no role of Pakistan National Shipping Corporation (PNSC) in oil shipments of the country. Pakistan pays international shipping companies $5-6 billion annually under the head of freight charges and could save this amount if oil shipment is completely assigned to PNSC.
Manufacturing Sector
The pandemic has also exposed the lack of diversity in the country’s industry sector. Pakistani industrialists have innovative ideas and skills but in order to materialize these ideas, they should be incentivized and facilitated at the governmental level.
There are around 3.3 million cottage and small industry or manufacturing units, which are providing employment to 16% of the total labor force of the country. In order to revive the sector, the government should advise banks and financial institutions to provide loans on relaxed terms and conditions.
Small and medium level enterprises encompass various sectors from agriculture, textile to fisheries, and need special attention. In order to enhance their technical capacity, import duty should be waived off on advanced technology equipment, which would equip SMEs to significantly contribute in the export pool. Recommendations regarding establishment of food processing units in food security sector need special initiatives.
Bank loan facilities should also be extended for SMEs and in this regard banks should design financial models on basis of partnership and mutual risk sharing. In order to revive and enhance their potential, immediate steps of tax rebates (export-related taxes) and concessions in utility charges should be given in the budget. Special incentives should be given to these industries for enhancement of their potential and technology by importing advanced machinery.
Services Sector
The services sector is the biggest sector of the country in the context of its contribution to GDP, i.e. 61%. In addition, the subsectors of wholesale and retail trade, transportation and communication, and banking also add to the importance of the sector.
Communication: The use of technology has increased manifold during lockdown in the domains of education, health, retail trade and marketing. Pakistan has substantial potential in this field, therefore it should jumpstart programs in the domains of infrastructure and skills. Assistance and incentives in technical aspects (increment in bandwidth speed, education and training regarding software and hardware, and provision of connectivity in remote areas of the country) will bear fruit due to presence of skilled human resources potential.
A significant cut in funds of higher educational institutes in last year’s budget led them to manage 70% of their expenditures by themselves. It is therefore recommended to increase the allocations in the budget for higher educational institutes and HEC in coordination with industry design projects and programs that not only provide funds but also enhance coordination among academia and industry.
Banking Sector
The resilience of the banking system has emerged positively during the pandemic. In this regard, further reduction in policy rate by SBP is suggested so that savings are maneuvered towards investment. Industrial and business loans should be distributed at rapid speed and introduction of new models based on partnership will enhance the confidence of business sector. Small and medium enterprises should remain focus of attention as far as partnership schemes are concerned because one of the major problems these enterprises face is of capital. In addition, industries that focus on exporting their products should be given special concessions and privileges in investment schemes.
Tourism remained priority sector of incumbent government and undoubtedly it has created many opportunities for the country. However, the impact of the pandemic on transportation has limited the take up of opportunities. It is believed that behavior of people has shifted more towards religion and this increases the potential of religious tourism. It is therefore the right time to prepare for the potential in this area and the outcome may emerge after international travelling starts.
Overseas Pakistanis
The issue of unemployment in the country has intensified and due to COVID-19 it is feared that a number of overseas Pakistanis, especially from the Gulf countries, may return. Despite the obvious impacts, no serious efforts are seen by the government quarters. While designing the policy, following three aspects need to be taken into account: Diplomatic efforts should be utilized to reduce the chances of returning of Pakistani expats from overseas and also to delay their arrival as much as possible. This whole effort should be an organized procedure; opportunities should be created for inducting returned overseas in various sectors; the savings of returning expats may be utilized in productive domains.
External Sector
The external sector may be seen in three sections: exports and imports, remittances, and external loans. The lockdown and decline in international demand have badly impacted the sector and specifically exports. On the other hand, the impact of the pandemic on major world economies led to unemployment of a large number of overseas Pakistanis, which has triggered a major decline in remittances. Thirdly, the heavy burden of international loans and their payment is another big challenge in this domain.
Considering the current economic condition and changing dynamics at international and national levels, demand renegotiation of the IMF program since keeping existing economic and structural conditions intact may lead to more disaster for the economy than bringing any benefit.
An alarming aspect is that no significant increase has been seen in tax revenues in the last three years.
Pakistan’s tax to GDP ratio is 10%, one of the lowest in the world. In order to make the tax system more effective and in compliant with current environment, the most important aspect is to increase the trust of people in the government. The second most important aspect is revamping the tax system – from oppressive and fear policy towards trust-building and friendly environment. In addition, tax collection process should also be made simple and understandable for every individual.
Imposing any new tax in current times would be considered as ignorant behavior of the government. In fact, rebates and concessions in domains of GST and income tax will increase the disposable income of people and ultimately have a positive impact on domestic demand.
Reliance on indirect taxes should be discouraged and focus should be shifted towards direct taxes. In this regard, it is necessary to ensure that there is no decline in nominal income of low-income group.
Strict action against tax defaulters is needed and nonproductive tax rebate schemes (amnesty scheme, etc.) should be banned and more efforts should be put in establishment of a strong and viable tax system.
Governance issues
The real problem of Pakistan is not scarcity of resources but ill management and bad governance. In the current environment, there is a need to reduce polarization among institutes, organizations, political parties and individuals. A consensus among all the stakeholders needs to be developed through a comprehensive economic policy.
The increment in responsibility of provinces after 18th Amendment demands a suitable environment to design comprehensive plan and strategy to cater to any emergency related to COVID-19. In this regard, role of National Finance Commission (NFC) is very important and therefore serious discussion may be held on issues of NFC. Additionally, other stakeholders (volunteer sector, industry, etc.) should be taken on board while designing policy.
Since the outbreak of the pandemic a shift in behaviors and work culture has emerged. These social behaviors and norms are temporary but a focus on their positive impacts may lead to permanent adoption of these behaviors. Similarly, simplicity and humbleness needs to be promoted in living style and eating behaviors and austerity parameters in non-development expenditure of the country.