Pakistan is facing the challenge of unsustainable public debt and the new government should reach an early agreement with the International Monetary Fund (IMF) for a long-term bailout package to continue difficult reforms, said outgoing Finance Minister Dr Shamshad Akhtar on Thursday.
In a departing note in the monthly economic outlook, Akhtar said that market confidence had been restored during the past few months and as a result the gross domestic product (GDP) was expected to grow around 3% in the second quarter of the current fiscal year. In the first quarter, the economic growth was 2.1%.
“At the heart of economic challenges is the unsustainable public debt position, with Pakistan in breach of the Fiscal Responsibility and Debt Limitation Act (FRDL) since 2013,” said the minister.
Although she claimed to have achieved fiscal consolidation, the budget deficit in the first half was 58% higher than the comparative period of last year, which was a reason for debt unsustainability.
Akhtar said that it was imperative that the new government completed the last review of IMF programme that would lead to the release of $1.2 billion loan tranche.
“Perhaps more important is that the new government reaches an early agreement with the IMF staff on a new medium-term facility, providing an anchor to carry out difficult reforms,” she said.
Pakistan’s debt has ballooned to Rs81 trillion and it now spends on debt servicing an amount that is more than the net federal income. Any future IMF programme should consider the possibility of debt restructuring, according to independent analysts.
Akhtar stressed that the next government should focus on restructuring the FBR, privatisation of loss-making state-owned enterprises (SOEs) including PIA and implementation of the SOE policy for improved governance and financial performance.
Despite all-out support for the privatisation ministry and the finance ministry, the caretaker government could not show progress on these critical areas.
Akhtar said that the government’s ability to service public debt was hampered by weak tax collection, rising losses of SOEs and the highest interest rate since 1972.
She added that measures taken over the last few months had restored market confidence and led to a pick-up in economic activity. The GDP growth accelerated to 2.1% in the first quarter after two consecutive quarters of negative growth.
The finance minister pointed out that the removal of import ban and other import restrictions eased supply constraints, leading to an increase in economic activity.
The second quarter data is showing a stronger performance by the manufacturing sector, with large-scale manufacturing posting an 8.2% growth.
“We expect second-quarter GDP growth to rise to around 3% on stronger manufacturing output and higher production of crops including cotton, which has increased by 75% to 8.35 million bales,” Akhtar said.
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She was of the view that difficult and unpopular measures including a reduction in subsidy on power and gas through timely implementation of quarterly tariffs helped improve primary accounts. No supplementary grants were released during that period and the PSDP projects that fell within the provincial domain were transferred to the provincial development programmes.
The finance minister acknowledged that the headline inflation had remained persistently high, but hoped for a significant decline in 2024 due to the measures taken by the caretaker government including the improvement in imports of raw material, higher food production and stability in exchange rate.
The government has cut its inflation forecast to 25.5% and it also sees economic instability “fading” away but said that the overall economic outlook still suffered from the restricting monetary and fiscal policies.
In its economic outlook, the Ministry of Finance stated that inflation may remain around 24.5% to 25.5% in February 2024, a forecast that is 2% less than its previous projection. It also expected lower inflation in March, projecting it in the range of 23.5% to 24.5%.
The inflation outlook for the upcoming month points towards a downward trajectory owing to better crops and smooth supply of commodities.
For the current fiscal year, the government and the State Bank of Pakistan (SBP) have set the inflation target at 21%, which may be missed with a huge margin.
The finance ministry said that in February there was an increase in the administered prices of petrol and diesel. Despite the upward adjustment in transport expenses and gas prices, the inflation outlook for the upcoming month may have a downward trend, primarily due to a decrease in prices of perishable items on the back of better crops and ease in supplies, it added.
A high base effect will further contribute to keeping the inflationary pressure reduced.
The report pointed out that the foreign exchange reserves held by the SBP again slipped below $8 billion, standing at $7.9 billion as of last week.
There was also over 21% reduction in foreign direct investment despite efforts made by the Special Investment Facilitation Council (SIFC). The finance ministry said that foreign direct investment decreased to $690 million in the current fiscal year, down by $187 million, or 21.4%.
The report pointed out that China had withdrawn some investment from the power sector. “In January 2024, the foreign direct investment witnessed a huge outflow of $173 million owing to the pulling out of investment aggressively from power projects, mainly by China.”
Chinese power plants are facing liquidity problems due to Pakistan’s failure to release their dues of Rs493 billion as of end-January.
Published in The Express Tribune, March 1st, 2024
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