In this new economic crisis, what Pakistan should ask for
Javed Hassan
Unexpected and fiendish challenges haunt the world in the wake of the coronavirus pandemic. To survive the unimaginable catastrophe that many lower income countries face will require unprecedented generosity combined with speed of action from developed countries and multilateral agencies.
The 1997 Asian and 2008 global financial crises in recent memory may have set the benchmarks for the savagery that global shocks wreak on economies and ordinary people, but the speed with which this jolt has overwhelmed the world, and the scope of its potential upheaval is likely to dwarf anything previously witnessed.
In many emerging market countries, such as Pakistan, the virus may have not yet taken its toll in terms of grim statistics of numbers infected and deaths, but the financial wreckage has preceded the full arrival of the disease.
The Pakistani rupee has fallen by over 7 percent in the last couple of weeks and the benchmark stock market index, KSE100, by over 25 percent. With a population of over 200 million people at risk from the health crisis and fiscal space already limited, the Pakistani leadership has tried to meet the challenge with thoughtfulness, while taking difficult decisions that can best help alleviate hardship faced by industry and commerce, and more importantly, by the people of Pakistan.
Prime Minister Imran Khan announced a Rs1,200 billion Economic Relief and Stimulus Package, which seeks to support the most vulnerable members of society, small and medium industries (SMEs) and rural farmers. The package includes the elimination of the import duties on imports of emergency health equipment, relief to daily wage workers worth Rs200 billion, and cash transfers to low-income families of Rs150 billion.
Similarly, the State Bank of Pakistan has adopted a set of measures including two new refinancing facilities. First, there is the ‘Temporary Economic Refinancing Facility’ (TERF) worth Rs100 billion in bank financing to stimulate investment in new manufacturing plants and machinery at a concessional rate of 7 percent per annum, fixed for 10 years. Second, there is the “Refinance Facility for Combating COVID–19” (RFCC) worth Rs5 billion to support hospitals and medical centers for the purchase of equipment to detect, contain, and treat COVID-19. It has also cut the policy rate twice by a cumulative 225 basis points to 11.0 percent in the span of less than two weeks.
The Pakistani relief and stimulus package totaling less than $7.5 billion pales in comparison to the pledge of some $12 trillion by the richest economies in the world - $7 trillion in monetary and $5 trillion in fiscal stimulus - responding to the urgent needs of their own domestic economies in the current crisis.
However, if they wish to ensure that the global $86 trillion economy continues to be sustained and grow evenly once the crisis is over, they will need to show similar openhandedness to less developed economies.
The relief package for ordinary Pakistanis, along with the continuing need to keep the economy from crashing, as well as shoring up foreign exchange reserves in a period when both declining exports and reduced inwards remittances will put severe pressure on balance of payments, and will require debt repayment relief.
PM Imran Khan has taken the lead among global leaders to call for a moratorium on debt payments. This has been followed by other leaders from developing countries, the World Bank, the International Monetary Fund (IMF), and the United Nations requesting debt repayment suspension for countries struggling in the wake of the coronavirus pandemic. World Bank and IMF cannot unilaterally restructure the debt of a developing country and have to rely on G20 members to take a decision.
The Pakistan government has also requested financial assistance under the IMF’s Rapid Financing Instrument (RFI) and the Fund has expressed its support in considering the request.
The managing director of the IMF, Kristalina Georgieva, said in a statement: “This emergency financing will allow the government to address additional and urgent balance of payments needs and support policies that would make it possible to direct funds swiftly to Pakistan’s most affected sectors, including social protection, daily wage earners, and the healthcare system.” It also commended Pakistan for the efforts it took to mitigate risks posed by the virus outbreak.
Pakistan already faced formidable macroeconomic challenges in fulfilling the stringent terms under the IMF’s Extended Fund Facility, which have been further exacerbated by the possible recession brought about by the pandemic. Although the Pakistan government has reaffirmed its commitment to the reform policies, it would not be unreasonable for Pakistan to request that some of the more onerous targets are suspended until that period when global economic activity resumes semblance of normality. For example, the requirement to significantly expand tax revenues to narrow fiscal imbalances will need to be temporarily relaxed.
While the reforms in themselves are crucial to boost Pakistan’s long-term growth potential to deliver broad based benefits for all Pakistanis, their implementation would be near impossible at a time when the country, for reasons beyond its control, faces both fiscal and balance of payments stresses. It is in the interest of all parties to review earlier agreements and modify them in a pragmatic manner such that they are tenable.