COVID – 19 Aftermath: Poverty, Inequality and Economy

 

COVID – 19 Aftermath: Poverty, Inequality and Economy

 https://nation.com.pk/Columnist/m-ali-kemal-and-muhammad-saleh-muzaffar

M. Ali Kemal (Tweets at @malikemal)

and

Muhammad Saleh Muzaffar (Tweets at @MuhammadSaleh06)

 

Inclusive growth is inevitable to sustained reduction in poverty. Inequality is considered an attached subject of poverty. Nonetheless, it is not necessary that they are moving in the same direction. Poverty estimates show declining trend since 2001-02 nevertheless same cannot be proclaimed for the inequality.

Economic activity is alarmingly shut due to COVID pandemic. Millions of people were expected to face job loss, casual and piece rate workers mostly. After lives of people, economic downturn, livelihood, well-being, and poverty is among the first few concerns during the current pandemic. This is one of the reasons higher premier is reluctant to opt for complete lockdown and followed partial and smart lockdown. Few possibilities of lockdown are discussed in the PIDE’s Bulletin.

Poverty has been declining for the last two decades. The initial 6 years of this decade has shown increase in the rate of decline compared to decade of 2000-2010. Annual average decline in poverty surged to 9 percent compared to previous decade, i.e., 5-6 percent. Overall Poverty declined by 2.86 percent every year since 2001-02. Forecasting the same trend, it is optimistic and ambitious to assume that by 2023, poverty will be reduced to single digit, albeit time to re estimate poverty line by then. Notwithstanding the current pandemic and lower growth may not reduce poverty rapidly.

Logically speaking, unambiguously decline in the economic activity, employment loss and livelihood issues directly affects the poverty level of the country. On the contrary, since the poverty is computed using consumption data given in HIES it may not be the case; poverty may not increase but remains the same or decline during the pandemic. Why?

Our argument of non declining poverty during the pandemic is based on; inclusion of 12 million households under the Ehsaas program, deferment of payments of borrowed principle amount and mark payments for 6 months to one year, decline in electricity bills by reducing fuel price adjustments and waiver of income taxes on the electricity bills etc. Besides Government’s stimulus packages, private sector, NGOs, civil society and other individuals in the society have come up and generously donating the needy items such as 15 day to monthly rations, medicines, masks, sanitizers and soaps to the needy households. Philanthropists overwhelmingly distribute prepared food at designated places.

The philanthropic deeds are part of religion, thus, what people are doing is not a surprise. BBC while interviewing a person reported “I am answerable if any of my neighbours go to bed hungry. How can I have an overstocked pantry while one of my neighbours is in need?”

Consequently, consumption may not decline due to tremendous philanthropic activities. It is expected that their consumption, overall, becomes higher and secured especially in the first three to four months than previously. Nevertheless, a pertinent question is how much time the philanthropists would do this; 3 months, 6 months or a year?

Nevertheless, we may not see the impact of pandemic on poverty due to non-availability of data. The current available data which will be used to estimate poverty will give us the numbers of 2018-19, i.e., before pandemic and the next data will be collected next year in 2020-21 and the estimates will be available in 2022.  

Inequality, at the same time, has vital and interesting dimensions. Although we are the strong believer that inequality does not matter much until it passes some significant threshold and growth of rising inequality is significantly higher and persistent. Pakistan is experiencing moderate inequality for a very longer period of time. Although official estimates are not available, but available estimates show mild up and down movements in Gini coefficients.

Inequality reduces there is a fair distribution of resources, wealth and redistribution of wealth/income which in turns reduces poverty as well. In the current scenario Households has been experiencing income loss. Ignoring the elite capture of resources, redistribution of money through Ehsas-program and philanthropic activities by the local society manages the distribution and redistribution of resources. In addition, capitalists are losing their income due to lesser or no businesses. All of these facts, consequently showing decline in inequality due to better distribution of resources.

Although lockdown is over, people may find work in different industries and services sector. But due to global decline in output the demand for our products may not go up. Income of the workers may decline and remain lower due to lesser business, hence lower weekly or monthly wages. Few estimates are available that shows scary situation of prolonged unemployment. Rehiring and employing new entrants in labour market may have issue in the next one year at least. Thus we are proposing the following measures to be taken;

1.     Second round of impact will be crucial after the dust settles. Decline in global trade may affect harshly to many industries. Therefore, domestic demand led growth will be the only feasible options for next few years.

2.     Decline in economy directly affects the livelihood of people. Government’s interventions such Ehsaas program lessen the adverse impact on livelihood. Moreover, philanthropic activities would also mitigate the impact of hunger and poverty. Ehsaas may increase the scope and range of its program until the pandemics ends. Philanthropists must not reduce the aid to the needy people.

3.     In the meantime, over regulated sectors need to be deregularised to create new businesses that reduce unemployment as well as burden on government budget. As a results inequality would also improve amid better distribution of resources.

4.     Next HIES data may capture the longer-term repercussions of pandemic on poverty. However, there is a need to design a short survey that covers at least data on (i) job loss and (ii) possibilities explored by the different households to do other businesses during pandemics.

 

Budget – Mirch Masala

 Budget – Mirch Masala

https://nation.com.pk/16-Jun-2020/budget-mirch-masala

The budget estimates of 2020-21 are out. It is a kind of festival in Pakistan. Every year announcement of budget creates panic in the economy and its players. Stock market behaved vaguely one week before and after the budget. Majority remains unhappy and few have positive opinions. These opinions also depend on the loyalty with the sitting government. The opposing party always opposes to it and give their own interventions. These interventions show the priorities of each political party sitting in the parliament. Nevertheless, the masses do not see these priorities while voting for their candidate in elections. Choice of vote is dependent on several other important factors.

Time has changed. A few decades ago, when centralisation and nationalisation were the main policies, the budget had extreme importance. The degree of centralisation and nationalisation has declined now. Privatisation was started in late eighties and it never stopped after that. Eventually, centralisation was partially killed by the 18th amendment in 2010. Nonetheless, Federal government is having numerous problems in doing several tasks after that. Nevertheless, the system needs to be rationalized. The power needs to be devolved at the lowest level to get maximum benefits. Hence, the provincial budget has more importance than the federal budget. Interestingly, 75 per cent of the SDG targets come under the provincial domain.

NFC gives approximately 58 per cent of the tax revenues to the provinces. In this budget, Rs2874b will be given out to provinces out of Rs4963b. The royalties on gas are not included in this amount. The rest of the tax revenues are Rs2089b.

Here is an interesting facts-based story; Federal government has Rs2089 billion from rest of the tax revenues. Debt servicing for this year is Rs2946 billion i.e., deficit starts by Rs857 billion; defence expenditures estimates are Rs1289 billion; deficit increases to Rs2146 billion. Adding civil and military pensions of Rs480 billion moves the deficit to Rs2626 billion. While adding Federal PSDP of Rs650 billion increases the deficit to Rs3276 billion. Besides these bigger heads several other heads contribute significantly to the budget deficit. There is no doubt that all the above-mentioned expenditures are essential. Although the deficit is reduced using non-tax revenues, i.e., Rs1109 billion and Rs100 billion privatisation proceeds, nevertheless, the deficit is still Rs3427 billion.

These numbers are just estimated numbers which are calculated using several assumptions and the impact of change in policies in the budget. However, I believe that the tax target of Rs4963 billion is achievable. FBR claims that they lost Rs500 billion in the last quarter of 2019-20 due to the pandemic. Improvement in economy, higher industrial growth than previous year, no major shocks to revenue collection, and 6.5 per cent increase in inflation may help in achieving the estimated tax revenues.

Besides the essential numbers mentioned above, everyone was looking at incentives that government will announce. Industrialists are waiting for subsidies and other incentives, exporters are looking for rebates and decrease in custom duties, traders are looking for relaxation in tax payments, pensioners and government employees are waiting for pension and salary increase and a common person is hunting for his piece from it. Every year all the media channels ask the experts about how the budget is if the government can achieve the announced numbers is it industrialists/exporters friendly budget or common person friendly budget etc.

This year everyone was thinking that it will be a COVID budget. However, majority of the expenditures under the COVID must be allocated in the provincial budgets. Before looking at those numbers any statement will be premature. It is noteworthy to mention that the stimulus packages in the wake of COVID-19 has already been announced by the Government including the 3 months defer payments on electricity bill, Rs144b Ehsaas emergency cash program, special financing rate for industries, special electricity rates for industries etc. Therefore, what is new in the current budget speech; few tax reliefs, regulatory exemptions, no increase in salaries and pensions and explanation of economic downturn due to COVID-19.

It is not a relief budget; it is not an economic revival budget but a survival budget that needs to be presented “by law” in front of the entire parliament. No one knows that when this pandemic is going to end. Thus, we may see changes in the announced budget when the picture of pandemic becomes clearer.

Therefore, we may see rollover budgets, one may call it mini budgets. It is a test for Government to mitigate the adverse impacts on the economy by keeping the economy in the right direction. Otherwise, the industries and services sector may not re-hire employees and the unemployment rate will increase and may go to double digits.

Among several announcements, a very important announcement was that inflation will come down to 6.5 per cent . Interest rates are already reduced by 5.25 per cent within 2 months after the pandemic. There is a chance to reduce it further by 100 basis points in the next two announcements. This implies that due to global economic meltdown, there won’t be much demand for our exports. As well as the domestic demand may not pick up quickly to raise the inflation. If all of this is true then inflation may remain around 6.5 per cent with an increase in unemployment, underemployment and overall economic activities.

Consequently, we may say that stimulus package for COVID-19 affectees (before budget), few exemptions and relaxations for businesses, spending to mitigate impact of COVID-19, and containing budget deficit are the main advantages of the budget. Surely, we may call it a “survival budget”.

Budget, to me is a mere accounting exercise. The agenda for reforms and important policy matters must be discussed in the parliament and the parliament must approve or disapprove of it whenever it is required. It must be very similar to other laws which are approved and disapproved at the parliament in their regular sessions.

The current crisis is an opportunity for the government to change the business as usual behaviour. This can be done through discussions with the relevant stakeholders. Ministry of Planning, Development and Special Initiative along with all the other ministries and institutes like PIDE can be very helpful in developing the reforms program. We must not waste this opportunity.

 

 

 

 

 

 

 

Coronavirus and macroeconomic interventions Part 2

Coronavirus and macroeconomic interventions

 

https://nation.com.pk/28-May-2020/coronavirus-and-macroeconomic-interventions

 

The incidence of the COVID pandemic was linearly increasing until it started affecting other parts of China and then exponentially increased as it spread globally. It has infected over 5 million people globally, with 335000 deaths (CFR 6.44%) and 2.1 million people recovered. The first case of coronavirus in Pakistan was reported on February 26, 2020. Over 50 thousand cases with more than one thousand deaths (CFR 2.15%) and over 15000 recoveries have been reported so far. It is indeed important to mention that the recorded incidence was highly dependent on the number of testing, which is very low in Pakistan.

The three problems which we are facing are; saving lives, saving livelihoods and salvaging the economy. Maintaining social distance leads to decrease in daily business as well as business closures. Hence, we are facing unprecedented job losses. Developed countries like USA have registered 35 million jobs lost by now. Due to this job loss, it is expected that half a billion people might go into poverty in developing countries.

Unlike USA and other developed countries, in Pakistan, 27.5 million (72 percent) people are employed in the informal sector; 4.8 million people are expected to lose their jobs in the services and industrial sectors, mostly daily wage workers and piece rate workers; 50 million people live below the poverty line; 120 million people are vulnerable to shocks. Above all, it is extremely difficult to tag people in dire need due to the presence of a large undocumented economy.

The GDP growth rate is negative for the outgoing year. This implies that the economic closure in the last quarter has offset the overall growth we have achieved during the first 3 quarters. This never happened since 1951-52. However, it shows the severity and extent of the pandemic, in urban societies especially.

Two months ago, when I wrote on the macroeconomic situation, the pandemic had started affecting the economy, livelihood and lives of the people. Nonetheless, experts were talking about the expected lower growth. IMF and a few experts already gave negative growth numbers in April, whereas many were not buying those numbers due to having different assumptions of the lockdown intensity and duration.

The economic situation is somewhat depicted by the movements in stock markets. The KSE 100 index was on an upward trajectory on February 26, 2020 (38338 points and hit the lowest on 25 March (27228 points). Whereas, the market is around 34000 index now and moving upwards gradually for the last one month. The initial decline was mostly associated with the decline in interest rate, reduction in oil price and the increase in coronavirus cases. The recent improvement in the market is associated with improvement in oil prices, the ease in lockdown albeit the corona cases are increasing, and the interest rate is decreasing. Overall, we can unambiguously say that investors are uncertain due to the situation and take their decisions very warily.

Notwithstanding, the Government of Pakistan has taken several steps to mitigate the impact of economic loss which eventually contributes to job loss. Full lockdown was not on the cards since day one, albeit social distancing was advised. Although the intentions were good, due to strong interlinkages among multiple sectors business activities were not normal.

The government has announced stimulus packages worth Rs1.24 trillion; offered several beneficiary programmes through Ehsaas including emergency cash transfer schemes; soft loans to business at discounted financing rates; rebate and tax exemption schemes to the investors. Nonetheless, many high-risk jobs are outside the scope of the Ehsaas programme, e.g., people working in the gig economy and other self-employed white-collar workers.

Following an ambitious target of Rs5555 billion in the Budget 2019-20, FBR was facing problems in tax collection due to numerous bottlenecks. Additional exemptions and loss in economic activities may reduce the overall tax revenues to less than Rs. 4000 billion. Furthermore, stimulus packages will lead to higher fiscal deficit than the commitment.

Global business shutdown is already affecting our exports by $2 to $3 billion. Remittances, on the other hand, might decrease by $0.7 to $1.3 billion. If there is a higher decline in imports than decline in exports and remittances then our balance of payment will improve.

It was expected that domestic as well as external demand for the local products will decline. As a result, overall investment will decline. People will be laid off. Consequently, inflation will decline. Evidence suggests that impact of quantitative easing or contraction may take nine to fifteen months to effect inflation. Whereas in the current situation it was very straightforward that demand will decline rapidly than contraction in money. Oil price declined in no time due to global recession. Thus, it was fair to assume that inflation would come down more rapidly to less than 7 percent, half of what we were having in January and February 2020. Therefore, I asked to reduce interest rate to 6 to 7 percent instantly in the last article. However, SBP has reduced the interest rate to 8 percent in two months and gave numerous other lower financing rates as a special package that increases the possibility of rent seeking.

Decline in interest rate has several implications; lower cost of fiscal deficit financing; lower returns on savings; higher private sector borrowing both for managing cash flow and clearing up other debts taken at higher borrowing cost; risk of outwards capital flight; fear of exchange rate depreciation etc. It will have a positive effect on the overall economy. Pandit Krugman recently called for a permanent deficit financed increase in public investment, arguing that debt sustainability is not an issue as long as interest rates remain below the nominal growth rate. Our nominal GDP growth is 8.6 percent thus a further reduction would be the icing on the cake.

Economically speaking, lower economic growth and higher unemployment are the two major obstacles of this pandemic. Furthermore, Pakistanis are being laid off and returning to the country, adding to the misery. Higher fiscal deficit along with lower revenue amid negative growth rate leads to higher tradeoff between saving lives and livelihoods.

We have just surpassed the first round of the impact of COVID. In the second-round, it is scary to presuppose that we will have more cases until we hit the peak, higher unemployment, an increase in nonperforming loans, in business closures, higher poverty incidence and higher inequality.

Recent Harvard Business Research suggests that the social distancing requirement will remain until 2022. Consequently, there is an urgent need to:

Strictly enforce social and physical distancing in every aspect of life;

The government should devise and enforce the SOPs for each sector as much as possible;

In support of the government, businesses must design their own SOPs for social distancing inside and outside the office/factory and implement hygiene standards following government SOPs. Albeit, it will increase the cost of production, but it will increase globally as well, hence relative competitiveness may remain the same;

Reduce the cost of production, the government must simplify the processes and lower administrative burden on businesses;

• Start construction activity such as new housing schemes, dams etc to increase employment;
• Start e-training for laid off individuals and others that do not have jobs;
• Increase effectiveness of tele-health and tele-education;
• Increase uninterrupted, high speed and inexpensive internet to all;
• Increase access to affordable and clean electricity to all;
• Tax cuts (corporate income tax and personal income tax) for at least two to three years for sustainable economic growth;
• The downturn of the economy gives space to the government to improve the institutions as well as rationalise the tax rates and other numerous vital interventions which will have longer term positive impacts on the economy.