Challenges and consolidation: Assessing Pakistan’s fiscal performance in FY2023
Pakistan’s fiscal performance in the fiscal year 2023 has been marked by consolidation efforts through revenue-raising measures and expenditure management strategies. However, certain downside risks loom towards the end of the fiscal year, primarily driven by higher-than-expected expenditures related to debt servicing costs and flood rehabilitation activities.
Additionally, the revenue collection by the Federal Board of Revenue (FBR) has shown growth but remained below the target, mainly influenced by a slowdown in economic activity and import compression. In response, the government is undertaking measures to reduce non-productive spending and enhance tax collection through policy and administrative initiatives. The finance minister asserts that Pakistan’s economic downturn has halted. He expresses certainty that Pakistan will always fulfill its payment obligations and avoid default. However, the decline in exports and remittances persists, accompanied by a rapid devaluation of the Pakistani rupee against the US dollar, and inflation has reached unprecedented levels. Urgent measures must be taken to prevent reaching a critical point of no return.
In recent months, the economic turmoil has intensified. The Ministry of Finance’s monthly Economic Update and Outlook for May reveals ongoing pressure on external payments due to reduced foreign exchange inflows throughout the year. In May, the value of exports reached $2.2 billion, experiencing a significant decline of nearly 17% or $433 million compared to the same month in the previous year. This raises concerns regarding the government’s approach to boosting exports, which has primarily involved providing subsidies to wealthy exporters who pay minimal income tax but benefit from subsidized inputs. While the Ministry of Finance estimates that exporters have gained an additional Rs1.5 trillion over the past three years due to currency devaluation, exporters argue that they do not receive subsidies and suffer losses due to the electricity expenses incurred by other consumers.
On a year-on-year basis, imports decreased by almost 37% to $4.3 billion in May, following a temporary period where imports fell below $3 billion in April. As a result, the trade deficit in May narrowed by half to $2 billion, marking a reduction of $2.1 billion compared to the same month of the previous year. However, on a month-on-month basis, the trade gap expanded by 143% due to a slight 2% increase in exports and a sharp 43% rise in imports, totaling $4.3 billion.
According to the Pakistan Bureau of Statistics (PBS), the gap between imports and exports decreased by $17.6 billion or 41% during the July-May period of the current fiscal year. Imports have declined by $21 billion or 29.2% compared to the same period last year, reaching a total of $51.2 billion in the July-May period. While import restrictions have temporarily averted a default, they have also severely impacted the economy. The government’s claim of 0.3% economic growth during the fiscal year has faced strong criticism from independent experts and contradicts data from the PBS. Initial projections indicated overall imports to be approximately $65.6 billion, but revised estimates now suggest imports may decrease to around $55 billion for the current fiscal year.
During the ten-month period from July to April of this fiscal year, workers’ remittances witnessed a decline of 13%, amounting to $22.7 billion compared to the previous year. The loss of $3.4 billion in home remittances nearly matches the upcoming debt repayments of $3.7 billion scheduled for May-June. This amount is also equivalent to the “financing gap” that Pakistan has been struggling to bridge in order to restore the funding programme with the International Monetary Fund (IMF). The impact of this loss becomes even more significant considering the dwindling foreign exchange reserves, which are only sufficient to cover the cost of controlled imports for a period of five weeks. These circumstances have heightened concerns about the possibility of a default.
The Pakistan economy experienced a provisional GDP growth of 0.29% in the fiscal year 2023, despite facing numerous challenges stemming from an uncertain external and domestic economic environment. These challenges have contributed to a persistently high trajectory of Consumer Price Index (CPI) inflation, even with monetary tightening measures in place, primarily due to the depreciation of the Pakistani rupee. The government’s implementation of fiscal consolidation measures in the past year supported economic sustainability. Additionally, the rehabilitation of agricultural activities during the Kharif season is expected to have a positive impact on economic growth. Overall, it is anticipated that an appropriate policy mix will lead to prosperity, economic growth, and an improved supply chain.
In April 2023, CPI inflation recorded a year-on-year increase of 36.4%, compared to a rise of 35.4% in the previous month. Possible factors contributing to the rising price levels include flood damages, disruptions in supply chains, macroeconomic imbalances resulting in devaluation, and political uncertainty. On a month-on-month basis, CPI inflation increased by 2.4% in April, compared to a rise of 3.7% in the previous month. The average CPI inflation during July to April in FY2023 stood at 28.2%, significantly higher than the 11.0% recorded in the same period last year.
During the July to April period of FY2023, provisional net tax collection grew by 16.1% to Rs. 5637.9 billion, compared to Rs. 4855.8 billion in the same period of the previous year. In April 2023, net tax collection experienced a slight 0.4% growth, reaching Rs. 482 billion, compared to Rs. 480 billion in the corresponding period of the previous year.
The current performance of fiscal indicators reflects effective consolidation efforts through various strategies to increase revenue and manage expenditures. However, there are potential risks to the fiscal sector towards the end of the current fiscal year. These risks could arise from higher-than-expected expenditures, primarily driven by an increase in debt servicing costs and expenditures related to flood rehabilitation activities.
Similarly, on the revenue side, the tax collection by the Federal Board of Revenue (FBR) increased by 16.1% during the period of July to April in FY2023, but it remained below the target. It is important to note that the growth, although lower than projected, was mainly driven by direct taxes. The slowdown in economic activity and reduced imports account for a significant portion of the lower-than-expected tax revenue during the review period.
In response to these challenges, the government is implementing effective measures to reduce non-productive spending through austerity measures and a focus on targeted subsidies. On the revenue side, the FBR is making efforts to enhance tax collection through various policy and administrative initiatives, considering the challenging economic environment at both domestic and international levels. These actions aim to manage fiscal imbalances, control the fiscal deficit, and maintain a sustainable level of primary balance.
Despite the challenges, Pakistan’s fiscal indicators demonstrate some consolidation. The government has taken steps to address the potential risks by focusing on reducing non-productive spending, implementing austerity measures, and targeting subsidies. The FBR is working towards enhancing tax collection through various initiatives. These actions aim to manage fiscal imbalances, control the fiscal deficit, and maintain a sustainable primary balance. By navigating these challenges and maintaining a disciplined fiscal approach, Pakistan can ensure long-term economic stability and growth.