FISCAL POLICY RESPONSE TO COVID-19 PANDEMIC: CASE OF PAKISTAN

Abstract

This study aims to explain the macroeconomic and welfare impacts of changes in indirect taxes brought about as a response to COVID-19. We study if tax relief provided in federal budget of fiscal year 2020-21 provided any relief to the private enterprise and trade sector. Another effort in this study aims to study if production subsidies during first wave of COVID-19 were able to effectively support firms in the agriculture sector. Using a PEP Single Country Recursive Dynamic CGE model, we simulate impact of changes in tax codes and production subsidies and explain five major results. First, out of all fiscal policy changes, those designed for manufacturing sector offer highest gains in real GDP and reduction in consumer prices (and increase in consumer welfare). Second, tax relief offered for services sector firms lead to highest investment gains. Third, while all simulations depicting changes in fiscal policy led to increases in exports, however this is also accompanied by an even higher increase in import demand. Fourth, we do see that consumption inequalities may have expanded as a result of the pandemic and fiscal policy responses. Finally, our qualitative assessment reveals how COVID-19 has led to widening of gender inequalities. Based on a structured public-private dialogue series (where results of this study were also presented), we offer policy recommendations which could help mitigate the challenges for both households and firms as a result of the pandemic.