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April 16, 2020

COVID-19 is Testing Pakistan’s PFM Limits

Covid
Muhammad Afnan Alam[1]

Pakistan’s government in late March announced a range of fiscal and monetary policy interventions to do “whatever it takes” to strike a balance between a lockdown and ensuring that economic activity continues throughout the country on a limited scale. The government has announced a PKR 1.2 trillion (USD 6.76 billion) fiscal policy intervention, equivalent to 3 percent of GDP, to frame-freeze the economy whilst the two tiers of Pakistan’s government (federal and provincial) are making an all-out effort to contain the spread of the pandemic.

The government has announced measures to support the poor and the business sector that include the following:  

  1. Cash transfers and grants amounting to PKR 144 billion targeted at 12 million poor families through Ehsaas - the country’s flagship social safety net program. The beneficiaries include 5.3 million poor households recorded in the program’s National Socio-Economic Registry (NSER) and targeting another 6.7 million beneficiaries through wealth profiling, data analytics, and average monthly utility bills. Cash transfers to existing beneficiaries are already screened through the NSER based on a nationwide Poverty Score Card (PSC) survey in 2010-11 which collected information on the socioeconomic and welfare status of almost 27 million households. This information is in the process of being upgraded. However, making transfers to the additional 6.7 million beneficiaries that are swift and transparent remains a challenge that has not yet been resolved.
  1. A supplementary appropriation of PKR 25 billion to the National Disaster Management Authority (NDMA) for the purchase of equipment to deal with the pandemic. The NDMA is in the front line for coordinating pandemic activities. The organization operates through a single-line budgetary allocation mechanism and its expenditures are routed through Pakistan’s FMIS.
  1. A one-time transfer of PKR 50 billion to the Utility Stores Cooperation, a federal government enterprise that provides subsidized basic commodities including wheat flour, edible oil, sugar, pulses/rice, and milk.
  1. Accelerated payment before the end of March of the salaries and pensions of 4.1 million public sector employees due on April 1. Similar early salary payments were made for local governments, municipal corporations and state-owned enterprises.
  1. Use of an emergency provision for federal and local governments to fast-track procurements for urgently needed medical equipment, protective supplies, and measures to ensure food security.
  1. A grant of PKR 100 billion to the Residual/Emergency Relief Fund for mitigating the effect of COVID-19.
  1. Payment of long-standing dues of PKR 105 billion for income tax refunds and drawback of customs duties, thus providing support to more than 650,000 businesses, enabling them to pay employee salaries and maintain their operations.

The PFM system, however, faces challenges in continuing to provide COVID-related support. For example:

  1. No guidelines have been issued on the criteria to be used in fast tracking procurements for crisis-related spending.
  1. Internal audit arrangements remain weak: the government has not been able to roll out the establishment of “Chief Internal Auditor” positions established under the PFM Act of 2019. This poses substantial risks to the transparency and efficiency of transfer payments and the streamlined procurement processes.
  1. The federal government presented its first budget strategy paper in March 2020 in compliance of the PFM Act. However, the economic assumptions and revenue forecasts did not consider the impact of the pandemic on the economy.
  1. The government was already facing massive revenue shortfalls in the first nine months of the financial year. The Pakistan Institute of Development Economics (PIDE), an affiliate of the federal Planning Commission, estimates revenue collection of PKR 4.4 trillion against the government’s latest projection of PKR 5.24 trillion. This shortfall will have significant impact on the development of sound economic and fiscal assumptions for the coming year.
  1. The government has not rolled out its cash-management policy for 2019-20, nor has it established a real-time gross settlement system (RFTGS). This may make it challenging for the government to put together an overall picture of available cash at any point in time and to ensure that enough liquidity is available for COVID operations.
  1. State owned enterprises and arms-length public sector agencies hold huge amount of cash outside the TSA structure citing either their functional independence or essential operational and commercial needs. These idle balances are not available to the government to meet their emergency spending requirements.
  1. Pakistan’s Supreme Audit Institution has yet to develop procedures which will enable it to conduct ex post audits of the regularity of payments made during the crisis and the value for money of emergency procurements.
  1. The PFM Act of 2019 introduced improvements in the dissemination of financial reports, but it is not clear that these changes will enable spending related to the COVID-19 crisis to be transparently reported.

To conclude, pandemics like COVID-19 shine a large spotlight on the responses of the PFM system in Pakistan. It remains to be seen whether the system is robust enough to deliver benefits to poor people and businesses in desperate need quickly and efficiently, while providing the necessary degree of accountability and transparency to satisfy citizens and NGOs, as well as the international agencies that are providing emergency funding.

This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.

 

[1] The author is a career civil servant and can be approached at afnanalam@gmail.com

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

 

Comments

Many developing countries are confronted with a major challenge while formulating a fiscal response to COVID 19 and the issues you mention are a good list of areas where attention is required.

However, I think we may be witnessing a major paradigm shift in the policy regarding the allocation of resources.

The major challenge that many LDCs face is that hitherto their policy focus had by and large neglected the poorest section of their populations.

The amounts of money that were allocated to items like health, education , poverty alleviation dwarfed when compared to the allocations for defense, large capital projects and other investments that at best had a secondary impact on the lives of the poor.

This category of the population were largely left to fend for themselves.

This policy focus was possible in the past since the government could continue to pursue this policy without much pressure from the poorest section of their population. COVID-19 changed this.

First, since the Virus does not discriminate on the basis of income, and it is highly infectious, ignoring the health and livelihood of the poor was no longer an option. Second, mitigation strategies such as lock downs etc., completely disrupted the means of obtaining daily livelihood for the poorest.

This forced the governments to pay attention and develop and expand income support programs like EHSAS etc. and augment scarce health facilities.

Long ignored voices demanding more attention to the needs of the poor have found a strange ally in COIVD 19 and has forced governments to transfer resources to address issues of this large section of the population in the LDCs. Hopefully this more equitable distribution of resources will continue after this nightmare ends.

COVID is an opportunity to re-orient the manufacturing strategy,of Pakistan

1st some basic facts.

1stly,there is no material requirement of Pakistan,whose complete import can swing international prices,or create temporary shortages or warrant preniums.Thus,besides the Agri,defense and Nuke industry,no other industry is strategic.Until there is cross border wheeling of power,from the North Pole to the South Pole,power will have to be produced in Pakistan - although that can also imported, at a far cheaper rate from Iran.

2ndly,when a nation makes some product,which can be imported at a far cheaper rate,it is essentially FORCING the users of that product,to pay a higher price,in the Billions of USD,so that other citizens of the importing nation,can be employed in those factories,and their supply chains.This is a conscious decision to keep humans occupied,and living from cheque to cheque,TDS to TDS,home loan to car loan etc.Else,people will revolt or be captivated and captured,by demagogues.Of Course the consumers,paying the higher price,have to clue about this sacrifice - as they are also,slaves to some car loan ponzi.

3rdly,Economies of Technological scale (based on latest technology that maximises yield and throughput and reduces wastages,losses, power and material requirement) will always exceed, by a huge margin,the economies of labour scale (which relies on technology,which leverages large numbers of low to medium paid labour).Exception is the Pakistan sports industry,which is labour driven and exports soccer balls etc.But that is because,no one is APPLYING HIS MIND, to Robotics in that area, and handcrafted products,are commaning a premium price,TODAY.Ultimately ROBOTS will take over,as there is no competition to 24 hours service (and no ESI and PF and Medical and other staff costs)

4thly,No matter what Pakistan does,no agri output produced by Pakistan,will have a COST OF PRODUCTION AT MANDI,which is even LESS THAN 150% of the CIF price of the imported product at KPT.In the future,USA and PRC (ignoring Africa),will be able to produce the ENTIRE FOOD OUTPUT,OF THE HUMANS AND ANIMALS AND SEA LIFE,at a cost, less than half of current costs, and in a time span of less than half,of what is takes today. However, the farmers have to be OCCUPIED and kept HAPPY,as else,they can overthrow any state, and easily get radicalised. The FACT is that,7 Billion humans COULD get food,at less than a fifth of the current prices (NOT COSTS),and double the quantity,that they eat today.They are suffering, to ensure that the farmers of North America, South America,LATAM, Russia, Australia are kept HAPPY,and that the farmers of INDIA do not hang from the trees and create a revolution. On principles of evolutionary perfection,farming is viable ONLY in nations with large land tracts and LOW DENSITY OF POPULATION.India is NOT in that GRID.PRC is in that grid,as it can CREATE LOW DENSITY OF POPULATION,AND ALSO,CREATE LARGE LAND TRACTS - as it is ruled by the CCP.dindooohindoo

Fiftly,Unlike the Technology Exports services,all service sectors,hinge upon manufacturing. Manufacturing drives all else.Even a Technology Export sector,has to have a domestic anchor - which is contingent upon Manufacturing.A manufacturing plant brings to life,a society and its eco-system,and over few decades leads to large wealth creation,which primarily begins from land and real estate prices and ends with bank credit.So unlike the Isle of Man - there are no Manx companies in Pakistan - and so,manufacturing is critical.

So the Manufacturing Strategy,has to be created within the above pentagonia,based on the competitive and comparative advantages of the raw material supply chain NSIDE Pakistan - as also,the ECONOMIC costs of the raw materials,which are NOT AVAILABLE,INSIDE PAKISTAN.

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