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Pakistan Budget Projects GDP Growth despite Coronavirus Pandemic

Opposition slams financial plan as unrealistic and contrary to interests of the people

[Islamabad] The Pakistani government unveiled an ambitious “tax-free” federal budget for the 2020-21 fiscal year that begins on July 1. It will see most spending go to debt service and defense. It also forecasts GDP growth despite what many say are prospects for a major recession fueled by the coronavirus crisis.

Hammad Azhar, federal minister for industries and production in this nation of some 220 million people, presented the 7.136 trillion rupee ($43.45 billion) budget to the National Assembly in Islamabad last Friday. It includes no new taxes and projects 2.1% GDP growth and a 7% deficit, down from the 9.4% expected in the current fiscal year.

Forty-one percent of spending is to be devoted to servicing the country’s debt, and 18% to defense, up from 12% in the previous budget.

The leading opposition parties held a noisy protest during the budget’s presentation and later walked out. Only a quarter of the legislators attended the session to allow for social distancing.

Earlier on Friday, the federal cabinet, while approving the budget, decided not to raise salaries and pensions for government employees.

Azhar said that the new budget “aims at striking a balance” between pandemic expenditures and the deficit.

“No new taxes have been levied in the new budget in order to provide relief to the people amid COVID-19,” he said.

“The government has formulated a special development program worth 70 billion rupees to offset the negative impact of the coronavirus pandemic and other calamities, and to improve the standard of living,” Azhar said.

Sherry Rehman, leader of the opposition Pakistan Peoples Party in the Senate, called it an “anti-people” and even “anti-Pakistan” budget.

“It is a cut and paste of last year’s budget just to get the accounting exercise done to appease the IMF,” she said in her post-budget speech in the Senate, referring to the International Monetary Fund. “It is a cruel and unusual budget as it completely ignores the crisis that is hitting the country.”

Rehman is a former federal minister and ambassador to the United States.

Shahbaz Sharif, leader of the opposition in the National Assembly and president of the Pakistan Muslim League party, called it “the most anti-public budget in the history of the country” and said it would lead to more inflation and unemployment.

Sharif, who tested positive for COVID-19 and was in self-isolation in Lahore,” said in a statement: “The coronavirus, inflation, unemployment and degradation of businesses have broken all records under the Imran Khan-led government, and this budget is a recipe for disaster as it will further worsen the economic state of the country.”

He added that for the first time, “the country’s GDP is in negative territory after inheriting 5.8% GDP growth from the PML-N government.” He was referring to his Pakistan Muslim League, which was voted out in 2018.

Some analysts say the new budget is aimed at avoiding the first recession in the country’s in 68 years.

With many people struggling with rising inflation and unemployment, as well as the economic damage caused by the coronavirus, they are asking what will happen if the economy collapses. Would Pakistan fall under the control of extremists? Would there be chaos? How would this impact neighboring Afghanistan as well as countries farther afield such as the United States?

Tamanna Salikuddin, director of South Asia programs at the United States Institutes of Peace in Washington, spoke to The Media Line in an exclusive interview.

“I do not believe, despite the dire economic conditions, that Pakistan’s economy will collapse,” she said.

“The Pakistani military remains a strong factor in maintaining state stability, and international allies of Pakistan, while themselves facing economic crises, will try to maintain some form of assistance, likely loans, to keep this crucial state afloat,” she added.

Salikuddin notes that with rising inflation, record unemployment and increasing debt, the situation in Pakistan is “quite serious,” the proposed budget coming amidst a contraction in the economy and, for the first time in many decades, negative growth.

“The coronavirus crisis hit Pakistan when its economy was already quite fragile and it was only just emerging from a macroeconomic crisis and an IMF bailout package,” she said.

The coronavirus crisis hit Pakistan when its economy was already quite fragile and it was only just emerging from a macroeconomic crisis and an IMF bailout package

“The newly announced budget does claim to be ‘people-friendly,’ as it does not introduce any new taxes, but it is also austerity-focused, with no increases for any sectors except defense and debt servicing,” she continued.

“The real threat to stability may be the estimated 10 million more people who are forecasted to fall below the poverty line, making the poor 30% of Pakistan’s population,” she said.

Salikuddin also notes that Pakistan’s COVID-19 emergency cash program disbursed over $440 million to almost 6 million citizens, although in the long run this will not be enough.

“To maintain economic stability,” she explained, “Pakistan will likely need additional international assistance going forward…. Given the coronavirus’s deleterious economic impacts globally, getting increased FDI [Foreign Direct Investment] or development assistance will be difficult, and the assistance will likely be in the form of continued loans.”

Michael Kugelman, deputy director of the Asia Program and senior associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington, also spoke with The Media Line, noting that the country was confronting one of its “biggest economic crises in years” even before the coronavirus.

“Pakistan will be able to look to a series of tried and true short-term stopgap measures that will prevent things from spiraling out of control. These include new loans from the IMF and bailout packages from dependable allies like China and Saudi Arabia,” he said.

Kugelman also cited loan forgiveness programs.

“Pakistan can’t take these stopgap measures for granted, and especially not in the short term, given that bilateral and international donors will be initially overwhelmed with economic needs closer to home,” he stated.

“Rising levels of unemployment leading to more poverty and food insecurity could cause social unrest in cities as people take to the streets to protest high food costs and a lack of jobs,” he warned.

“The Pakistani military, if the need arises, will be perfectly willing to deploy troops on the streets to restore order,” he added. “This may not be good for democracy, but it would help restore stability in the face of an inevitably volatile economic situation.”

Responding to The Media Line’s overarching question, Kugelman said: “I don’t think the economy will fall apart. There won’t be chaos, and anti-state extremists − who have already been degraded in a big way in recent years − certainly won’t take control of the country.”

Javaid Qaisar, a leading, Islamabad-based economist and former regional director at the Institute of Cost and Management Accountants of Pakistan (ICMAP), told The Media Line that there was likely to be a “boost” in economic activity and industrial growth.

“The budget contains one significant measure, that is, a zero-duty rate on all raw materials and a good protective regime for products produced by domestic industries,” he said.

“Incentives have been given to the construction industry, which is the most labor-intensive industry, having the capacity to absorb skilled, semi-skilled and unskilled workers,” he noted.

“The government has also facilitated export-oriented industries and created an enabling environment for the export of goods to the international market at competitive prices. All these measures have the potential to avert recession and the threat of economic slowdown,” he said.

He noted that Pakistan’s economy has some inherent strengths, most notably its agrarian base, which is least affected by COVID-19 and is providing a livelihood for around 70% of the rural population.

“The myths of economic collapse, unrest and [a country] falling in the hands of extremists are baseless and without any substance,” Qaisar said.