FeaturedNationalVOLUME 19 ISSUE # 20-21

Persistent inflation and fiscal challenges

The latest monthly report of the finance ministry provides insights into the projected inflation trends and fiscal challenges faced by Pakistan. Despite expectations of moderate inflation amidst upward pressures, the report underscores the government’s efforts to mitigate these challenges through various measures.

The finance ministry’s report projected that inflation would range from 22.5-23.5%, gradually decreasing to 21-22% in April 2024. Despite upward revisions in petrol prices and the traditional surge in consumer spending during Ramazan, the report described the inflation outlook for March 2024 as moderate. This moderation was attributed to the government’s efforts to curb inflationary pressures through administrative measures, including an increased allocation in the Ramazan relief package from Rs7.5 billion to Rs12.5 billion. Additionally, the phenomenon of the high base effect and a decrease in the Food and Agriculture Organisation’s food price index contributed to easing inflationary pressures.

In the week ending March 28, inflation saw a decrease of 0.09%, primarily attributed to a decline in food prices, marking the second consecutive week of deceleration compared to the previous week. According to data from the Pakistan Bureau of Statistics, the weekly inflation rate remained slightly elevated at 29.41% compared to the same week last year. Weekly inflation is gauged using the Sensitive Price Indicator, which tracks 51 essential kitchen items. During the week, out of the 51 items, prices of 4 (7.84%) items increased, 18 (35.30%) items decreased, and 29 (56.86%) items remained unchanged from the previous week. Tomatoes topped the list of price drops on a week-on-week basis, decreasing by 12.04% to Rs92.71/kg. Following closely was wheat flour, which dropped by 3.80% to Rs2,628.69/20-kg bag. Prices of other commodities decreased by up to 2.59%, including garlic, LPG, onions, potatoes, bananas, pulse gram, and sugar. However, the prices of chicken, eggs, shirting, and rice Irri 6/9 increased by up to 5% during the week. The year-on-year trend shows an increase of 29.41%, with gas charges for Q1 contributing heavily to the 570% rise in its price. Other commodities witnessed increases of up to 86.05%, including chilli powder, onions, men’s sponge chappal, men’s sandal, garlic, gur, chicken, salt powder, sugar, energy saver, and pulse mash.

However, the finance ministry acknowledged that the widening fiscal deficit signaled ongoing pressure on public finances. The government reaffirmed its commitment to fiscal discipline and revenue mobilization efforts, particularly in light of the ongoing IMF program and potential negotiations for a new bailout package. The ministry, unveiling its updated annual borrowing plan, outlined Pakistan’s heightened gross financing needs aimed at addressing the budget deficit and debt repayments.

The latest report indicates a substantial increase in the projected federal budget deficit for the fiscal year 2023-24, reaching a record Rs8.54 trillion compared to the previously approved target of Rs7.5 trillion by the National Assembly. This revised estimate represents a significant rise of Rs1.03 trillion or 14% above the budgeted goal, amounting to 8% of the nation’s GDP—a level deemed highly unsustainable and exacerbated by existing debt burdens. The revision was necessitated primarily by earlier inaccuracies in reporting interest payments and overly optimistic forecasts regarding inflows from foreign debt. Reports in last September revealed that the ministry had underestimated interest costs by over Rs1 trillion and overestimated foreign loan disbursements by approximately $4.5 billion.

According to the report, the allocation for interest payments has surged from the budgeted Rs7.3 trillion to Rs8.33 trillion, with domestic interest payments rising from Rs6.4 trillion to Rs7.4 trillion, and external loan interest payments climbing from Rs872 billion to Rs998 billion. As a consequence of these adjustments, and assuming all other expenditures remain unchanged, the federal budget’s size has swelled to a historic Rs15.5 trillion, compared to the Rs14.5 trillion approved by the previous National Assembly in June 2023. Crafted by the Debt Management Office of the finance ministry, the updated annual borrowing plan delineates the government’s borrowing strategy to meet its gross financing needs. The report emphasizes continued engagement with both domestic and international investors to enhance coordination and information transparency.

The ministry lamented that had it heeded the advice of the debt office in June of the previous year, the latest revision stemming from debt servicing costs could have been avoided. Notably, interest expenses for the first half of the current fiscal year reached Rs4.2 trillion, with 88% attributed to interest on domestic debt. For the ongoing fiscal year, Pakistan’s gross financing needs are estimated at a record Rs25.5 trillion, equivalent to 24% of the Gross Domestic Product (GDP)—a figure significantly surpassing the sustainable financing level estimated at around 15% of GDP for a developing nation like Pakistan.

The report emphasized the importance of sustainable economic recovery through fiscal consolidation and prudent policies, alongside adequate financial inflows to meet financing needs and maintain external sector stability. Despite challenges, the report anticipated moderate headline inflation in the last quarter of FY2024, driven by favorable domestic and global factors, including improved agricultural outlook and recovery in the Large Scale Manufacturing sector.

Moreover, the report highlighted a significant rise in net federal revenues during July-January FY2024, attributed to increased tax and non-tax collections, particularly from domestic sources. However, rising expenditures, notably on debt servicing, widened the fiscal deficit by 38% during the first seven months of FY2024, underscoring the ongoing challenges posed by debt obligations.

In conclusion, while the report anticipates moderate inflation and acknowledges persistent fiscal pressures, it emphasizes the government’s commitment to fiscal discipline and revenue mobilization. With a focus on sustainable economic recovery and prudent policies, Pakistan aims to tackle these challenges and promote economic stability in the coming months.