Saving to spend post Covid-19

We have converged in our thinking that this is likely a time of a prolonged global recession, at least for 2020, recognising that recession is a rare event. Covid-19 has forced economies, to a varying degree, to be offline in an effort to minimise the contagion rate. This is negatively impacting companies’ earnings. The world is scrambling to find resources to protect businesses and households in the short-term and fund an economic recovery going forward.

Actions by G-20, the IMF and multi-laterals, through debt rollover and new debt financing, will buy Pakistan time but only national action will find us cures. Finding a cure for overhauling the national budget by financing expenditures through superior alternatives as opposed to burdening the taxpayer is a good starting point. Raising revenues for the budget through non-debt creating instruments — including divestment, recovering taxes and monies owed to the state — hold the big bang for the buck, but managing expenditure at a structural level will be the crowning achievement. The post-Covid economy will require rounds of spending — the more these rely on savings, the more sustainable the economic outcomes.

The myth that budget expenditures are rigid with little room for savings is only partially true. Attempts for budgetary savings are invariably limited to unnecessary cuts in development expenditure — an option best avoided when the economy needs a stimulus for reviving growth. Economic growth anchored in savings rather than borrowing can yield long-lasting dividends for the country. It is thus fundamental to control the steep rise and flatten the curve of expenditures like the unsustainable and unfunded pension liability. The past five years have seen a doubling of federal pension expenditure. A paltry amount of Rs50 billion in FY2009, grew to Rs215 billion in FY2015; Rs342 billion in FY2019; and to Rs421 billion in FY2020. Astonishingly, it’s almost as much as this year’s federal development expenditure. A continued yearly increase of 33% can potentially double the pension expenditure to Rs800 billion by FY2023.

Pensions are ballooning owing to yearly adjustment for inflationary impact; rise in number of recipients; increasing average age requiring longer-term payments; and increasing family pensions, from 50 to 75%. The story at provincial levels is even more frightening. At an intellectual level, the concern is similar to that of the government guaranteeing the private energy producers payment of a fixed rate of return, irrespective of productivity.

A cure to reduce government expenditure, based on sound economic reasoning, is to create a retirement funds’ market. The magic of markets will give an individual, manoeuvrability to build her/his own nest. From investing in high growth, balanced or fixed interest funds to diversifying across asset classes including shares, property or government securities, people will exercise their choices depending on their risk appetite, life cycle and retirement needs. Superannuation arrangements will be put in place by the government, to encourage people in the state service to accumulate funds, leading to a steady income stream post-retirement. Retirement funding would be compulsory and incentivised by tax benefits encouraging individuals to a pay-as-you-go approach. Advanced economies have moved to allow people to run self-managed funds. Hopefully, once the federation leads the reform, provinces can follow suit.

What’s good for people is good for the economy. Shift from state pensions to pension funds will improve the current dismal savings rate of 10%. Pension expenditures can become a non-debt creating instrument as they fade away from budget in the future. Commissions have run their life with their reports left unattended with little or no follow-up. This is a real chance to create a new budgetary framework, weaning off growth in expenditures through structurally altering the nature of savings. An effort led by the economic leadership and implemented by a dedicated team of fiscal experts, chartered accountants and fund managers and operationalised in a given time-frame. We are in an existential crisis — every bit of government spending needs a rethink. Sound economic management is all that will work.

Published in The Express Tribune, May 2^nd, 2020.

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