FeaturedNationalVOLUME 18 ISSUE # 40

Economic outlook remains grim

Now that the Pakistan Democratic Movement (PDM) government is no more, experts are evaluating its economic performance during its 15 months in power. The picture that emerges has more negatives than positives.

Among other things, there was a massive increase in fiscal deficit which rose to 7.7 per cent of gross domestic product (GDP) contrary to its claim of 7pc. According to the data released by the Ministry of Finance, the overall fiscal deficit stood at Rs6.521 trillion during FY23, much higher than its targeted Rs5.94tr, showing a gap of about Rs580bn. The government also failed to contain the primary deficit – the gap between income and expenditure other than interest payments – which rose to 0.8 pc of GDP totaling Rs690bn as against its claimed figure of Rs421bn.

The responsibility for this slippage lies with both the federal and provincial governments. The Centre estimated Rs459bn provincial cash surplus but the actual amount realised was only Rs155bn, leaving a shortfall of about Rs304bn, while the remaining gap of about Rs385bn was on the part of the federal government.

Another negative development recorded during the PDM regime was a staggering 83pc increase in debt servicing cost over a period of one year which jumped from Rs3.18tr or 4.8pc of GDP in FY22 to Rs5.83tr or 6.9pc of GDP in FY23 – a back breaking burden for the economy.

On the revenue side, too, the government performed dismally. In FY22, the revenue-to-GDP ratio was 12pc which declined to 11.4pc in the last fiscal year (FY23). The tax revenue-to-GDP ratio also declined from 10.1pc in FY22 to 9.2pc by the end of FY23. While revenue declined, the total government expenditure increased by 22pc to Rs16.155tr in FY23, while current expenditure rose by 27pc to Rs14.58tr. No wonder, to close the fiscal deficit, the government resorted to massive domestic borrowing amounting to Rs7.2tr during the year ending on June 30, 2023.

According to the State Bank of Pakistan, the country’s total debt and liabilities also surged by 29 per cent, or Rs17.332 trillion in FY23 to reach Rs77.104tr during FY23, compared to Rs59.772tr in FY22. As a percentage of GDP, total debt and liabilities reached 91.1 per cent, up from 89.7pc in FY22. Excluding liabilities, the total debt of the country in FY23 stood at $72.991tr, compared to Rs56.837tr in FY22.

This shows a rise of 28.4pc as compared to 24.7pc in the preceding fiscal year FY22. As a percentage of GDP, the debt was 86.2pc, compared to 85.3pc in the previous fiscal year. The data indicates that domestic debt rose to Rs38.8tr in FY23, up from Rs31.085tr in the previous fiscal year.

As a result, debt servicing costs surged to Rs9.819tr in FY23, compared to Rs5.578tr in FY22. In dollar terms, debt servicing increased by $5.7bn to $20.8bn in FY23 from $15.1bn in the preceding year. Details show that Pakistan paid $16.39bn as a principal amount and $4.420bn in interest on external debts. In FY24, the country is projected to spend around Rs7.3tr on debt servicing, including both interest and principal amounts. This constitutes 50.5pc of the total budget outlay of Rs14.46tr.

As things stand today, the economic challenges facing the country remain formidable. In the latest development, Foreign Direct Investment (FDI) shrank 23.27 per cent month-on-month to $87.7 million in July in the midst of uncertain political and economic conditions. In the meantime, inflation continues to rise. Short-term inflation rose 27.57 per cent on a year-on-year basis for the week ending on Aug 17 largely due to a surge in petroleum prices. On a week-on-week basis, the weekly inflation, measured by the Sensitive Price Index (SPI), rose 0.78pc, showing an upward trend for the past four consecutive weeks. This is because petrol and diesel prices during the last few weeks have been raised by a hefty margin.

Rupee depreciation, higher petrol prices, rising sales tax and electricity bills are among the key factors driving the inflationary trend. According to the latest International Monetary Fund (IMF) forecast, the average Consumer Price Index (CPI) for the current fiscal year is projected to be 25.9pc as against the previous year’s 29.6pc.

The overall economic outlook remains concerning. Pakistan’s current account balance again landed in negative zone, registering a deficit of $809 million in July, in the wake of a jump in import payments and slump in worker remittances. The State Bank of Pakistan has projected the current account deficit to be in the range of 0.5% to 1.5% of gross domestic product ($3.5 billion to $5 billion) for FY24 with economic growth of 2-3%. But how the situation actually turns out only time will tell.