Finance ministry spells out 5 major economic challenges

ISLAMABAD: Pakistan continues to face five major and persistent economic challenges including fuel prices, poverty and inflation, said the Finance Ministry.

In its fifth quarterly performance report to the Asian Development Bank (ADB) on $1.5 billion Building Resilience with Active Country-cyclical Expenditures (BRACE) released on Monday, the Ministry of Finance said that overall, the impact of Russian-Ukraine war on the economy of Pakistan is significant, mainly due to high fuel prices.

Fuel prices have relatively high multiplier effects and high fuel prices can cause decrease in economic activity across different sectors. High fuel prices not only reduce the direct consumption of petroleum products but also shrink other sectors such as electricity production, industrial demand, goods transportation, travelling, mining, construction, and many others.

ADB speaks of ‘major economic challenges’

It further stated after fuel, edible oil has the most impact on the GDP and household consumption, but it is almost double for the poor. Due to the relatively higher elasticity of oil with its price, demand shock is greater than wheat and almost double in poor households.

As Pakistan remains largely dependent on imported palm oil (all from Malaysia and Indonesia), it remains highly prone to any upward shock in prices and can also cause deterioration in the healthy diet structure of children.

The Russian-Ukraine war crisis has a serious impact on poverty that can increase the burden on the already tightened fiscal space. Post-Disaster Needs Assessment Report of the 2022 floods, released by Ministry of Planning, Development and Special Initiatives stated that the national Poverty rate may increase by 3.7-4.0 percent by pushing 8.4-9.1 million more people into poverty due to devastating calamity.

Any potential cash handouts or expansion of Benazir Income Support Programmes (the existing transfer payment program) can further increase the existing high fiscal deficits.

Rising inflation, particularly food inflation (highest in the history of Pakistan), increase in administered prices of petroleum products, electricity, and gas and continuous depreciation of the country’s currency have a negative impact on household consumption which will lead to greater poverty, particularly in rural areas.

The ministry stated that while the global crisis, because of the Russian-Ukraine War, was expected to result in slowing down the economic growth in Pakistan, its adverse impact on poverty, food insecurity and deteriorated diet quality are likely to be more pronounced.

However, the cataclysmic floods in 2022 in Pakistan affecting 33 million people and 1.8 million hectares of cropland across the country; damaging cotton and rice crops, perishing to 1.16 million as per the NDMA Post-Disaster Needs Assessment Report of 2022 foods and major damages to public infrastructure and private properties will lead to lower economic growth in FY2023, higher poverty and food insecurity, and worsened diet quality, especially in rural areas.

On the fiscal front, despite encouraging revenue performance, the expenditure side is under pressure attributed to higher markup payments. However, government measures to control non-mark up spending helped in improving the primary surplus during the first six months of fiscal year 2024.

The overall fiscal deficit has been widened by 2.3 percent of GDP, while the primary surplus improved by 1.7 percent of GDP during July-December fiscal year 2024

During the first half of fiscal year 2024, Federal Board of Revenue (FBR) revenues grew by 30 percent to reach PRs 4,469 billion against PRs 3,429 billion in the same period of last year. Non-tax revenue witnessed a growth of 108.8 percent.

The budgeted Vs actual expenditures position shows that 19 percent of annual allocated budget is utilised during the first quarter of fiscal year 2024.

No subsidy has been budgeted for providing subsidized gas to export oriented Industries. Henceforth, no subsidy has been released during the first quarter of fiscal year 2023-24. Pending claims of Sui Northern Gas Pipeline (SNGPL) and Sui Southern Gas Company Limited (SSGC) amounting to Rs730 million for providing subsidized RLNG to export sector during 2022-2023 are yet to be cleared. This amount has been re-appropriated from the budgeted subsidy for “RLNG Diversion to Domestic Sector” and henceforth the pending have been cleared.

No programme or project was assigned to Pakistan Agricultural Storage and Services Corporation (PASSCO) under ADB funded BRACE program so no allocation was made during FY 2024.

The budget for “subsidy for import of urea of fertilizer” has been allocated under Grant No 45-FC21G01-Grants, Subsidies and Miscellaneous Expenditure being dealt by Finance Division.

BISP disbursed PRs 69,222 million to 2.769 million flood victim families @ Rs25,000 per family across Pakistan during FY 2022-2023. To meet this budget requirement from within the approved allocation of BISP for 2022-2023, an amount of Rs50,419 million was re-allocated under the head of “Emergency Flood Relief Cash Assistance”. Remaining amount was charged to the head “unconditional cash transfer.”

Copyright Business Recorder, 2024