FeaturedNationalVOLUME 18 ISSUE # 42

No hope of early economic recovery

All indicators show that there is no hope of an early economic recovery. The rupee is constantly falling against the dollar while inflation is going through the roof. According to the latest reports, the Sensitive Price Indicator (SPI), which tracks 51 essential commodities, recorded a 24.39% increase in August, 2023, as compared to the same period last year. This surge in prices is drastically cutting the purchasing power of average households.

Experts blame the volatile inflation trend on the persistent rise in power and gas tariffs. Additionally, the government’s practice of passing on increases in international oil prices to local consumers is worsening the situation.In its latest Fiscal Risk Statement (FRS) 2023-24, the ministry of finance has drawn a bleak picture of the economy. It has cited IMF policy implementation, higher sovereign guarantees and poor performance of state-owned entities (SOEs) as potential risks that could impact the country’s fiscal outlook and external stability in the coming days.

It has pointed out that federal government exposure to SOEs, in the form of outstanding stock of loans and guarantees, stood at 9.7pc of GDP in FY21, and public and publicly guaranteed debt stock reached 78.4pc of GDP at the end of FY22. External debt constituted about 37pc of the total public debt, while the fixed-rate debt portfolio currently stands at 26pc of total public debt, increasing refinancing risks. Furthermore, the average time to maturity of domestic debt was 3.6 years for FY22.

Among other things, the financial risk statement 2023-24 puts the spotlight on macroeconomic shocks, debt and guarantees, climate and natural disasters, SOEs and public-private partnerships (PPPs) given that these represent the most important fiscal risks facing the government. Global factors like supply chain disruptions, inflationary trends and prolonged Russia-Ukraine war coupled with the State Bank’s risingpolicy rate to fight inflation continue are having a negative effect on domestic economic activities.

The inflation rate in Pakistan is under severe pressure due to currency devaluation and higher energy and food prices in the global market. The Pakistani rupee has constantly lost its valuedue to various risk factors such as trade imbalances, external debt, political instability, and global economic slowdown.

According to the ministry of finance, the pace of economic activity during FY23 has slowed down due to several factors, including demand suppression, losses in agricultural production caused by floods, uncertainty regarding the IMF programme, external financing needs constraints and dwindling foreign exchange reserves.

As things stand, the uncertainty surrounding the future adjustment in energy prices constitutes a downside risk for the economy. The latest figures show that external debt constitutes 40.8pc of total public debt, which may make the government’s fiscal position vulnerable in the face of high current account deficits, low foreign exchange reserves, and a weakening exchange rate. A lack of foreign exchange reserves coupled with large external payments has resulted in liquidity issues and destabilised the exchange rate and domestic interest rates, further increasing the burden of external loans that are measured in local currency.Another aspect of fiscal risk is Pakistan’s exposure to floating debt, making it vulnerable to increase in borrowing rates that may arise due to unfavourable economic conditions. The share of a fixed rate in domestic debt was 26pc and around 70pc in external debt.

Experts expect some relief if there is a decline in international commodity prices and the government succeeds in reducing the fiscal deficit by implementing measures such as expanding the tax net, rationalising subsidies, and promoting economic growth. In this context,steps are required to secure refinancing of the government’s maturing debt while raising additional debt to fulfil the fiscal shortfall.

The Ministry of Finance is already engaged with the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan to develop domestic debt capital markets and increase the participation of other entities such as insurance companies and pension funds.

All efforts to stabilize the economy will come to naught unless the working of state enterprises is rationalized. In total, there are 204 SOEs, of which 85 are categorised as commercial enterprises. Overall, SOE revenues in FY19 were approximately Rs4tr, while their book value of assets was Rs19tr. While commercial SOEs are expected to be a source of revenue for the federal government, in the form of taxes and dividend payments, net inflows have been negative. According to the ministry of finance, some SOEs provide essential services in several sectors to many vulnerable consumers, making the complete elimination of quasi-fiscal burdens on SOEs politically and economically unfeasible. In a nutshell, the outlook for the economy remains gloomy in the short term, with hopes of mild recovery afterwards.