Ministry expects slow economic recovery

Says inflation outlook has deteriorated with risk to external stability

ISLAMABAD:

The Ministry of Finance said on Friday that Pakistan’s economy would recover slowly and its inflation rate would decrease gradually, the forecasts which suggest that there is no short-term respite from the current economic crisis that has impacted every household.

In its Fiscal Risk Statement for the current financial year, the ministry underlined that a slow but steady recovery of the economy was expected.

Pakistan’s real GDP growth was just 0.29% in the last fiscal year, which too is disputed by the IMF that put it at negative 0.5%.

The finance ministry hoped that over the medium term, economic growth was expected to rise to levels even higher than the five-year average growth of 4% and eventually reach 5.5% in 2026.

Read Inflation surges to 28.3% in July

Commenting on the inflationary pressures, the report underlined that “a gradual decrease in inflation rate due to improvement in domestic and global factors and PKR stabilisation is expected over the medium term”.

The comment suggests that miseries, mostly caused by mismanagement, currency devaluation and increase in prices under IMF’s conditions, are not going to end soon. The Pakistan Bureau of Statistics reported on Friday that inflation stood at 27.4% in August, higher than the annual target of 21%.

“Inflation outlook has deteriorated, and there is a heightened risk to external stability,” the finance ministry warned and added that the uncertainty surrounding the future adjustment path in energy prices was the main upside risk to the inflation outlook.

Furthermore, exchange rate adjustments, passing on the impact of energy price increases and interest rates on the higher side would enable prices to decline over the medium term, it added.

The ministry attributed the constant double-digit inflation to currency devaluation, energy and food prices in the global market. Pakistani rupee has experienced significant depreciation in recent years, influenced by various risk factors such as trade imbalances, external debt, political instability and global economic conditions.

A more significant-than-expected slowdown in global demand could have a negative impact on Pakistan’s export outlook and workers’ remittances, according to the report.

However, global and domestic uncertainty poses a downside risk. On the upside, a larger-than-anticipated slowdown in domestic demand or a relatively sharp fall in global commodity prices could improve the current account deficit and reduce fiscal risk, it added.

The finance ministry said that due to a high share of external debt at 40.8% in the total public debt, the “government’s fiscal position remains vulnerable in the face of high current account deficits, low foreign exchange reserves and a weakening exchange rate”.

Pakistan has budgeted Rs7.3 trillion for debt servicing, which sources in the Ministry of Finance said would prove insufficient to meet needs.

The ministry said that the lack of foreign exchange reserves coupled with large external payments resulted in liquidity issues and destabilised the exchange rate and domestic interest rates, further increasing the burden of external loans that were measured in local currency.

Over the last five years, the total public debt has exceeded the prescribed limit of 60% of GDP under the FRDL Act. This is primarily due to consistent fiscal deficits, averaging 6% of GDP since 2010, which have led to a rapid build-up of debt.

“Moving forward, the government plans to retain a reasonable proportion of commercial debt within the total external debt, for the purposes of diversification and maintaining a presence in international capital markets.”

Interim Finance Minister Dr Shamshad Akhtar has raised questions over the finance ministry’s plans to borrow $4.5 billion in foreign commercial loans.

The report noted that another source of fiscal risk was Pakistan’s exposure to floating debt, making it vulnerable to increase in borrowing rates that may arise due to unfavourable economic conditions.

Maintaining a significant proportion of fixed-rate debt within both domestic and external debt is crucial for managing interest rate risk, as it safeguards the borrower against sudden increases in borrowing rates.

However, at present 74% of the domestic debt and 30% of the external debt is based on floating interest rates, which is increasing the cost for the government.

Published in The Express Tribune, September 2^nd, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.