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Pakistan Budget Risks: Climate Change, SOEs & More

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By Sajjad Hussain, Islamabad   Jun 17, 2024 10:30

Pakistan's government outlines key risks to its 2024-25 budget, including climate change, weak SOEs, and economic growth concerns. Learn more about the challenges facing the country's fiscal outlook.
Pakistan Budget Risks: Climate Change, SOEs & More
Islamabad, Jun 17 (PTI) Pakistan's cash-strapped government has highlighted almost a dozen critical risks to next year's budget and medium-term outlook, including lower than estimated economic growth, unexpected climatic or natural disasters as well as continuing poor performance of state-owned entities.

In a written statement on the fiscal risks submitted to Parliament, Finance Minister Muhammad Aurangzeb and Secretary Imdadullah Bosal said a combination of three risks — higher than the estimated interest rate, lower than non-tax revenue collection and higher subsidies — had the most significant impact on fiscal variables across the board.

"The combination of reduced revenues, increased expenditure on subsidies, and potential financing needs due to higher interest rates lead to substantial fiscal deficit and higher debt stock,” the Dawn newspaper quoted the statement as saying on Monday.

It underscored the interconnectedness of fiscal policy and the need for comprehensive approaches to address fiscal challenges.

These risks are critical because of a record Rs 12.97 trillion revenue target for the Federal Board of Revenue of Pakistan for the next fiscal year, up 40 per cent from Rs 9.415 trillion missed target during this besides a mammoth Rs 2.5 trillion funds expected from the State Bank of Pakistan's profits.

However, both the technocratic and bureaucratic heads of the Ministry of Finance do not see the prevailing political situation and weak coalition government to be of any risk to the fiscal and economic plans of the newly formed federal and provincial governments after the controversial February 8 general elections.

Jailed former Pakistan Prime Minister Imran Khan's Pakistan Tehreek-e-Insaf party has rejected the outcome of the elections as rigged.

The statement said any increase in the interest rate on external and domestic debt could lead to a rise in federal expenditures and subsequently, the federal fiscal deficit and total debt of the government.

“If this possibility is realised, the overall effect will be substantial without additional measures.” Based on current projections, the federal fiscal deficit for next year is estimated at Rs 8.5 trillion or about 6.9 per cent of GDP.

The statement said a significant reduction in non-tax revenue collections could also lead to a substantial decrease in net federal revenue and a consequent incre­ase in the fiscal deficit.

“Additionally, the higher deficits contribute to an increase in debt stock over the forecasted period.”

While the government has pitched more than Rs 1.363 trillion for the next fiscal year, the ministry said the increase in subsidies leads to an increase in expenditure, and the effect on fiscal deficits and debt stock is relatively limited.

Higher subsidies support the targeted sectors or programmes but “may also strain government finances if not accompanied by corresponding revenue measures or expenditure controls”.

Talking about the fiscal risk arising out of lower GDP growth, the statement said this envisaged lowering the projected GDP growth rate by a quarter in each fiscal year over the medium-term budgetary framework.

“While this scenario does not directly affect fiscal policy measures, it has implications for revenue generation and expenditure planning,” according to the statement explaining that the lower GDP growth rates lead to a decrease in net federal revenue due to subdued economic activity.

Consequently, there is pressure on fiscal deficit and debt accumulation, as the government may need to maintain or increase expenditures to stimulate growth amid lower economic performance, the statement said.

Moreover, the ministry warned that the more-than-expected depreciation of the rupee will significantly impact fiscal sustainability by increasing the cost of servicing external debt, as repayments and interest on foreign-denominated loans become more expensive in local currency terms.

“Additionally, a weaker rupee can lead to higher import costs, fuelling inflation and putting pressure on public expenditure, particularly if subsidies on essential goods like fuel and food are in place,” it said.

As a result, the combined effect of these factors could lead to a higher fiscal deficit and an increased debt burden, exacerbating fiscal vulnerabilities.

Moreover, the statement noted the accelerated impacts of climate change have added "a new layer of pressure" on the economy, including the exogenous shock of severe climate disasters, which in 2022 exerted significant losses on GDP, it said, adding that rising inflation, high indebtedness, low growth, currency depreciation, and depleted foreign currency reserves have added to the scale and multitude of challenges.

It also pointed out that stringent climate change mitigation could significantly raise government expenditures and resultantly, the federal fiscal deficit.

Pakistan, in 2022, was hit by devastating floods that submerged one-third of the country, affecting 33 million people, half of whom were children, and killing 1,739 people.

The total damage from the devastating floods is estimated at Rs 3.2 trillion (USD 14.9 billion), with a total loss of Rs 3.3 trillion (USD 15.2 billion).

Recalling the 2022 floods and the vulnerabilities this disaster caused, the statement called for the creation of a “Natural Disaster Fund (NDF)” to help mitigate fiscal deficit, at least to some extent.

The finance minister also highlighted the risks arising out of poorly performing State-Owned

Entities that cause almost Rs 1 trillion in annual loss to the exchequer.

The Ministry of Finance also emphasised stable macroeconomic policies to prevent excessive exchange rate fluctuations and attract long-term investments, contributing to overall economic resilience and minimising fiscal risk, while simultaneously accumulating foreign exchange reserves for a financial cushion against exchange rate volatility.

Pakistan's economy is currently facing severe economic crises with the cash-strapped country narrowly averting debt default in July last year after the IMF approved a USD 3 billion Stand-By Arrangement.

The Pakistan government is currently in talks with the International Monetary Fund for a loan estimated to be between USD 6 billion and USD 8 billion, as it strives to avert a default in a slow-paced economy.
Source: PTI
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