Pakistan's economy may grow, but ‘policy shift required’ for new fiscal

Planning Commission terms Rs600b allocation for PSDP insufficient to boost economic growth

Shahbaz Rana May 01, 2020
Representational image. PHOTO: REUTERS

ISLAMABAD: Pakistan’s economic growth momentum may still remain positive but from the new fiscal year, the country needs a major shift in monetary and fiscal policies to offset the adverse impact of coronavirus (Covid-19), the Planning Commission advised a top legal body on Thursday.

“The public sector spending should be used as a tool to stimulate economic growth and spurt consumer spending but the finance ministry is not yet willing to loosen its purse strings,” Deputy Chairman Muhammad Jahanzeb Khan recommended during a meeting, of the Monetary and Fiscal Policies Coordination Board (MFPCB) chaired by Finance Adviser Dr Abdul Hafeez Shaikh.

SBP Governor Dr Reza Baqir, Commerce Adviser Razzak Dawood and others were in attendance.

The Planning Commission also recommended diverting savings from low interest rates and additional fiscal space towards the Public Sector Development Programme (PSDP).

The MFPCB has been recommended to adopt “accommodative fiscal and monetary policies” and give fiscal stimulus to micro enterprises to kickstart the economy.

The commission told the high-level meeting that Pakistan’s economy may still register positive growth in the range of 1.5% even if partial lockdown conditions continue till June 30. But in case of complete lockdown till June 30, the economy may contract.

Ia t also sees inflation rate at 6% in the next fiscal year, which is lower than the State Bank of Pakistan and the International Monetary Fund objections and provides room for further cut in the interest rate.

The MFPCB is a statutory forum that has been set up under an act of parliament to coordinate monetary, fiscal and trade policies of Pakistan.

However, this month, the SBP recommended the federal government to abolish the board, prompting the finance adviser to stress the importance of the body.

“This high-powered board facilitates the policy makers to review and coordinate in an effective manner to adopt a comprehensive set of policy actions to overcome the economic challenges that we are facing at internal and external fronts,” a finance ministry handout quoted Shaikh as saying.

The SBP wants the abolishment of finance minister-led MFPCB and its proposed plan includes the consolidation of policy and top management at the central bank.

After postponing the meetings for at least three times, the board met on Thursday to review the current economic situation in the post-Covid-19 scenario and discuss measures to restore economic growth from the next fiscal year.

The Planning Commission told the high-level meeting that Pakistan’s economy may still register positive, growth in the range of 1.5% even if partial lockdown conditions continue till June 30. The Planning Commission’s assessment was different from what the IMF, the WB, the SBP and the finance ministry were projecting. All of these institutions have projected up to 1.6% contraction in economic growth in this fiscal year.

“Accommodative fiscal and monetary policies adopted by the government will be helpful in stimulating economic activities,” said the Planning Commission deputy chairman in the meeting.

The deputy chairman apprised the meeting that coronavirus has dampened the confidence of both the consumers and investors. Thus, “both demand and supply have been disrupted and the society is following risk aversion behaviour”, Jahanzeb said in the meeting.

The Planning Commission recommended that there “is a need to boost public spending through the PSDP”. But the finance ministry has recommended only Rs600 billion for the PSDP in the upcoming budget, which the planning ministry wants to be increased substantially to boost economic growth.

The SBP has set the interest rate at 9% but various bodies and independent economists have called to further reduce it to at least 7%.

The meeting discussed various projections and it was decided that the concerned government departments would further firm up their numbers. The participants emphasised the need for having in-house macroeconomic modelling capacity.

Shaikh has emphasised the need for better coordination among stakeholders for reaching a consensus on targets of macroeconomic variables and the required policy actions to achieve them, said the finance ministry.

Shaikh further stressed that all organs of the state should play their role in this difficult time e to fully capitalise their potential to achieve the set macroeconomic targets as per their mandate.

The finance secretary said that for the first time primary balance posted surplus of Rs104 billion or 0.2% of the gross domestic product during July-March period of this fiscal year as compared to a deficit of Rs474 billion or 1.2 % of the GDP during the same period last year.

For the next fiscal year, the IMF wants fiscal consolation of Rs1.2 trillion or 2.5% of the GDP, which may further suppress the economic growth, said sources in the Ministry of Finance.

The finance secretary stated that the pandemic has brought multiple challenges for Pakistan’s economy. Prior to Covid-1a 9, the GDP growth was estimated at 3.24% for 2019-20 and after the pandemic, it may decline significantly, he added.

The SBP governor said that the central bank has provided stimulus to the economy through a cut in the policy rate and increasing quantity of money by injecting additional liquidity.

Commerce Adviser Dawood was of the view that in the prevailing situation, exports would be around $21 billion to $22 billion – at least $4 billion less than the official target.

Dawood said, “Imports will fall to $42 billion -- $11.6 billion lower than estimates – mainly due to decline in international commodity and oil prices. There is a risk of decline in remittances as well,” he added.