ISLAMABAD: Finance Ministry has cautioned that fiscal risks may lead to potential threats or uncertainty in fiscal forecasts presented in Medium Term Budget Strategy Papers (MTBS) from fiscal year 2024-25 to fiscal year 2026-27.
Finance Ministry on Friday released MTBSP and its statement of fiscal risks noted that any increase in the interest rate on external and domestic debt can lead to a rise in federal expenditures and subsequently, federal fiscal deficit and total debt of the government.
The report highlighted that Pakistan’s economic trajectory requires a blend of short-term and long-term measures to navigate through challenges such as high inflation, current account deficit, low foreign exchange reserves, and substantial debt burden.
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A primary objective of the Medium-Term Fiscal Framework is to facilitate policy formulation based on reliable projections of revenues and expenditures after reflecting upon various sources of revenue and heads of expenditure while considering historical trends as well as emerging challenges, said that report.
The combination of the first three scenarios – higher interest rate, lower non-tax revenue and higher subsidies –demonstrates the most significant impact on fiscal variables across the board. A combination of reduced revenues, increased expenditure on subsidies, and potential financing needs due to higher interest rates leads to substantial fiscal deficit and higher debt stock. It underscores the interconnectedness of fiscal policy and the need for comprehensive approaches to address fiscal challenges.
The combined effect of lower GDP growth and more than expected depreciation of rupee can lead to a higher fiscal deficit and an increased debt burden, exacerbating fiscal vulnerabilities. Moreover, depreciation could undermine investors’ confidence, leading to capital outflows and further currency depreciation, creating a vicious cycle of financial instability.
Financing requirements of SOEs render fiscal accounts at risk as entities like GENCOs, WAPDA, DISCOs etc face significant exposure as well as despite being an almost negligible contributor to global warming, the costs of climate change to Pakistan are substantial and continuously increasing as the country faces severe economic challenges.
Mitigation measures include; (i) stable macroeconomic policies prevent excessive exchange rate fluctuations and attract long-term investments, contributing to overall economic resilience and minimizing fiscal risk: (ii) accumulating foreign exchange reserves provides financial cushion against exchange rate volatility. During periods of economic stability and favorable trade balance, the government can build foreign currency reserves and manage these reserves through investments in safe and liquid assets: (iii) developing policies that support export-driven sectors increases foreign currency earnings and improves the trade balance. A stronger export sector enhances foreign exchange inflows, reducing pressure on currency and helping to stabilize it: (iv) creating a conducive environment for FDI boosts foreign currency inflows and supports economic growth.
Ensuring political and economic stability, improving ease of doing business, offering tax incentives, and protecting investors’ rights are key strategies for attracting FDI and by supporting sectors that are less vulnerable to climate impacts and promoting new industries that contribute to a greener economy, the fiscal base becomes more robust and less susceptible to climate-related disruptions etc.
It said that the government key priorities are strengthening macroeconomic sustainability and laying the conditions for balanced growth.
The paper envisages to increase the GDP growth from 3.6 percent in the current fiscal year to 5.5 percent in fiscal year 2026-27, inflation to decrease from 12 percent to 7 per during the period, current account deficit -$3.707 billion to -$5.055 billion, export to be increased from $32.341 billion to $37.051 billion in 2026-27, imports from $57.283 billion to $67.078 billion and remittances from $30.2 billion to $32.9 billion and FBR revenue from Rs 12970- billion to Rs18047 billion in 2026-27 and fiscal deficit from 6.9 percent of the GDO to 4.9 percent of the GDP in fiscal year 2026-27.
Copyright Business Recorder, 2024
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