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Amid Pandemic, Pakistan Looks For Economic Opportunity

People line in the eastern Pakistani city of Lahore to receive free food before the time to break the Ramadan fast on May 3.
People line in the eastern Pakistani city of Lahore to receive free food before the time to break the Ramadan fast on May 3.

As the world grapples with the economic fallout of the coronavirus pandemic, one country is possibly turning the challenge into a prospect for greater economic gain.

Leadership statements indicate that Pakistan is looking to the COVID-19 outbreak to offset some of its longstanding economic problems and remodel domestic resource distribution as it attracts significant international aid to boost an ailing economy.

But it is not clear whether this outlook will ultimately benefit tens of millions of impoverished Pakistanis or will further strengthen the powerful military’s dominance and control over resources. While the outbreak has claimed more than 475 lives, it has taken a much more extensive toll on millions of jobs and small businesses.

“This crisis may create more fiscal space for Pakistan,” says Ali Nadir, a private equity and investments specialist who focuses on the country, home to more than 210 million people. “It is imperative that the space thus created is utilized for improving the health infrastructure and other development spending.”

Nadir says that before the coronavirus outbreak Pakistan was grappling with a two-pronged economic crisis. It struggled with the current account deficit as its imports far exceed exports and ran a fiscal deficit with expenses far outstripping revenues. While funding a vast military, Islamabad spends a considerable amount on repaying debts, which exceed $100 billion.

“Pakistan was doing reasonably well on the balance of payments side primarily due to a significant drop in imports and the large influx of the so-called ‘hot money’ attracted by high interest rates,” he said of the country’s economic outlook prior to the outbreak. “However, on the fiscal side, the situation was extremely worrying as the anemic growth was resulting in a significant miss in the government’s revenue targets.”

It was evident Pakistan was falling significantly short of the $35 billion (5.5 trillion Pakistani rupees) revenue target agreed with the International Monetary Fund (IMF) for the 2019-2020 fiscal year. It was not even expected to meet the revised figure of $26 billion in January.

As the government squeezed taxpayers, high interest rates and mounting import tariffs prompted runaway inflation that in January stood at 14.6 percent in a year-on-year comparison.

“The situation was far from stable with a mini-budget around the corner which would have further increased the tax burden, hiked utility prices, and further squeezed the population,” Nadir said. “The government’s fiscal room was next to zero, and the next few months would have been a continuation of a very painful period for ordinary Pakistanis.”

But the current coronavirus pandemic appears to have reversed that trend. As cases began to mount in March, Prime Minister Imran Khan pushed for Pakistan’s debts to be written off.

"The world community has to think of some sort of a debt write-off for countries like us, which are very vulnerable, at least that will help us in coping with [the coronavirus],” he argued in an interview with the Associated Press. “My worry is poverty and hunger."

A statement following a late-April crisis meeting at the Finance Ministry “underlined the need for pursuance of a clear, transparent and unified plan of action combining a ‘whole of the country’ approach backed by necessary constitutional measures to sail out of the crisis.”

It recommended expenditure rationalization, reduction of low-impact spending, and revenue generation. The “necessary constitutional measures” include a government effort to roll back the decade-old constitutional 18th Amendment, which granted provinces considerable financial autonomy. The military opposes the amendment.

The Pakistani government and independent experts agree that the global effects of the pandemic have already hit Pakistan hard. Its exports and remittances, a major sources of foreign currency reserves, have declined, while the ‘hot money’ investments have also decreased. The IMF has predicted a recession with a negative growth rate of minus 1.5. Last year, the country’s GDP growth already shrunk to 3.3 percent from 5.7 percent the previous year.

But the global financial efforts for coronavirus relief have already brought Islamabad significant financial respite. Pakistan has already received commitments of $2.7 billion from the IMF, the World Bank, and the Asian Development Bank. G20 debt relief has earned it another $1.8 billion. This cumulative amount is significant given that the country is currently part of a $6 billion IMF program. International lenders such as the IMF are likely to be more lenient on the government if it fails to meet budgetary targets.

Nadir says the country will also benefit from a lower import bill because of the sharp decline in oil prices. Last week, the government announced some reduction in fuel prices, but its overall revenue collection from petroleum products is expected to rise. He argued that a recent interest rate cut is likely to reduce domestic borrowing costs, which will free up space in the domestic budget.

“All things being equal, this may actually provide the country with more fiscal room and the ability to avoid passing on many painful measures to the public,” Nadir said. But he noted that Pakistanis have not seen any significant policy announcement about the reduction in non-development expenditures.

Islamabad has announced a multibillion-dollar stimulus package to mitigate the fallout of the crisis. It has also committed hundreds of millions of dollars to millions of poor people in cash grants. But it has yet to follow other nations in cutting its defense budget.

Author Ayesha Siddiqa, an expert in Pakistani military’s financial clout, sees little chance of the military agreeing to a budget cut. Instead, she sees a military stranglehold over international assistance while some of the money is channeled to debt relief.

“They have put themselves in a position where [with] any amount of aid coming to Pakistan, they will be in charge of the distributive system,” she told RFE/RL’s Gandhara website.

Siddiqa argues that to prevent a reduction or redirection of its estimated $10 billion annual budget, the military is pushing to roll back the 18th Amendment. “Their main aim is to get rid of 18th Amendment so that they can ensure their existing share,” she said.

For now, the coronavirus outbreak in Pakistan appears to be expanding. Two weeks after the country relaxed some lockdown measures, thousands of new cases have been reported while the death toll has doubled.