'IMF's $1.4b, lower interest rates helped create fiscal space'
The government had already budgeted for parts of its relief package, so the arrival of $1.4 billion in IMF support means it has the breathing space to ramp up welfare for daily wage workers under the lockdown.
This is the argument of Dr Hafiz Pasha, a former finance minister and economist, who was interviewed on SAMAA TV’s show ‘Sawal’ by host Amber Rahim Shamsi Sunday night.
The stock market has gone up, the interest rate down, the rupee up against the dollar—was this all good news? Who did Dr Pasha think was right: The prime minister who says the economy can’t take the lockdown or the Sindh chief minister who says you can revive a dead economy but not dead people.
“We should think more about people’s lives,” he replied. “So, I think that if you do a scientific and strategic lockdown what you should do more is speed up your relief program so people can bear the lockdown.” He then broke down several changes on the macroeconomic front to explain his position given the week’s developments.
We weren’t doing well anyway
It is correct to say that our country’s economy was not doing that well before the arrival of coronavirus (because to reduce the current account deficit we choked it by raising the interest rate to a multi-decade high). This has to a large extent worsened our GDP growth forecast which has dropped from 2.6% to minus 1.5% for the fiscal year ending June 2020. There is a danger of the economy getting worse, he said.
The relief package was already in the budget
Enter the IMF with its $1.4 billion in support for Pakistan. “One worry is that they said that the government said it has a relief package of Rs1,250 billion but the IMF thinks it is just Rs500 billion,” said Dr Pasha.
“This is because some things were already provided for in the budget,” he added. So for example, the Ehsaas/BISP program’s Rs144b expense was already in the budget and is thus not an additional expense. Then there is spending which will not fall on the federal government. The most prominent example is of Rs244b to be spent on buying wheat which is actually going to be by provincial governments.
And the government has more breathing room
Two things point to this. One, the interest rate has come down by 4.25% to 9% from 13.25% and has benefited our federal budget immensely (since the government takes fresh loans to service previous debt, a 4.25% reduction will make new borrowing cheaper and create some fiscal breathing space for the government to spend money where needed).
“So our loan interest repayment would be reduced about Rs1,000b,” according to Dr Pasha. “And if they have really kept a provision of Rs1,250 billion [for a relief package], we will have a lot more capacity to give relief. That is why I say that this relief program should be sped up.”
He felt that the reduction in the interest rate was delayed three to four months but something is better than nothing at this point.
He feels that at the next monetary policy meeting we could see a further slash of 1% or 2% more. “This benefits the budget and business liquidity (businesses can borrow at a cheaper rate and will have more funds to spend),” he argued. “These are appropriate policies and should be taken forward.”
He was critical of the way the interest rate was handled in a bid to keep hot money in.
“Our [SBP] governor said that he’d reduce the interest rate and then the rupee will go down,” Dr Pasha said. He was referring to when the SBP cut the rate by 0.75% on March 17 and then by 1.5% on March 24. Foreigners got the hint that rates would continue to come down and they started taking money out of Pakistan in large quantities in the form of dollars. That made the dollar go up from Rs155 to Rs168.
“It is interesting that you saw the interest rate go down and the rupee went up Rs4,” he said. (Because the dollar dropped by Rs4 in the outgoing week). “That is why we said the 13.25% interest rate is too high. And in the pursuit of attracting hot money you kept the interest rate at this level. God forbid you get a small shock (Covid-19 caused panic), the money will exit,” he said. “We lost 80% and $3.4b (invested in T-bills since July 2019) to $2.8b (taken out from T-bills by foreigners since March) left.”
But hold on…
Dr Pasha pointed out that while we are receiving $1.4 billion in emergency funding from the IMF, our ongoing IMF programme has been suspended. Remember how we secured a $6 billion bailout in July 2019? “As a result we will not get two tranches and so it goes down $900 million,” he said. “We will get a net of only $500 million.”
But what about the G20 bilateral debt reduction? “Pakistan, in my opinion, will get at the most $1 billion,” he said.
A bigger worry: repaying our loans
Pakistan’s external debt is $111 billion and growing rapidly, pointed out Dr Pasha. In two years we’ll have to pay up to $11 billion every year. We’ll have to generate this money through borrowing. “This burden has grown beyond a limit,” he said. “God forbid, going ahead we could see hard times.”
And so when we hold elections in 2023, whatever new government comes to power, it will inherit a worse economy than the one the PTI inherited.
Dr Pasha did say it was worth mentioning one PTI success, that it reduced our trade deficit in the first year from $20b to $13.8b and this year for various reasons it will come down to $5b. “But the problem now is that the repayment of old loans has swelled a lot,” he said.
Shamsi asked him about minister Sheikh Rasheed’s comment that if we had not received the G20 debt servicing relief we would have gone towards “default”.
Dr Pasha was politely critical: “With all due respect, these statements reduce confidence in the market. He is an old minister but using the word ‘default’ is not appropriate and is factually incorrect.”
To further his argument to increase the welfare from the government, Dr Pasha said that we had to worry about poverty going up since the GDP growth rate is turning negative.
“The danger is joblessness in the next few months, long term, not lockdown related,” he said. He estimates up to six hundred thousand people could be rendered jobless. This would push into poverty 15 million to 20 million people.
The last time things were this bad was perhaps in 1951-52, he said when we had a minus 1% growth rate. We went to 0% when the 2008-9 financial crisis came. But this year, he sees a 2% to 2.5% reduction.
“You’ve increased [the Ehsaas programme] from 5m to 12m families which is a good step but now perhaps next time you can take it to 17m to 18m families,” he said. “This is essential. People are at risk of starving.”
He also argued that the government should not increase the petroleum levy at all as this will make everything more expensive. This is not the time to increase taxes.