FeaturedNationalVOLUME 19 ISSUE # 13

Tough economic challenges for the incoming government

As reported by independent economists earlier, the previous PDM government had made a mess of the economy. This is now confirmed by the Fiscal Policy Statement 2024 prepared by the Ministry of Finance. According to the statement, there was a sharp rise in the country’s debt burden during the fiscal year 2022-23, and the individual burden for every Pakistani increased by 25.2% to Rs271,624 by the end of the year.

At the same time, the gross public debt jumped to Rs62.9 trillion by June 2023, due to a sharp rise in interest payments on debt and the exchange rate devaluation. It has been revealed that the coalition partners in the PDM government behaved irresponsibly, wasting valuable fiscal resources on an unwieldy and unsustainable Public Sector Development Programme (PSDP).

No doubt, unprecedented floods wreaked great havoc on the economy, but the policy statement points out that the fiscal slippages mostly occurred in areas unrelated to the floods and were more about imprudent economic management and wrong budgeting. The PDM  government also missed last fiscal year’s annual budget deficit target of Rs4.54 trillion, with the actual deficit estimated at a record Rs6.7 trillion. In terms of the size of the economy, the total fiscal deficit was equal to 7.9% of GDP.

The federal expenditure increased to Rs11.3 trillion as against the budget estimates of Rs9.3 trillion—a slippage of Rs2 trillion or 21.5% of the total. The rise in current expenditures was largely caused by mark-up payments which remained at Rs5.7 trillion—a slippage of Rs1.75 trillion.

The finance ministry report has emphasised that the total current expenditures remained at 123.5% of the budget estimates in fiscal year 2023. The amount spent on subsidies was also in excess of the initial estimate – Rs1.08 trillion as against the budgeted Rs664 billion. After the transfer of resources to provinces, Net Federal Revenue receipts were Rs4.7 trillion against the budget estimate of Rs5 trillion.During the last fiscal year, actual development expenditures of Rs890.3 billion remained slightly above the budget estimates of Rs871 billion. The PDM government also violated the FRDL Act on two counts—bringing the public debt to 57.5% of the GDP and containing the budget deficit below 3.5% of the GDP.

The backlog of these slippages will hang heavy on the incoming government which would be faced with the difficult task of undertaking long overdue economic reforms and implementing the privatisation programme. Rising energy prices and inflation will also be difficult to manage. Consequently, the inflation rate will continue to surge, making life difficult for the common man. According to experts,  the Pakistani rupee may stay stable against the US dollar and other major currencies in the short run but the stock market and Eurobonds may come under pressure due to unresolved political uncertainties.

It is relevant to point out here that the PML-N’s finance minister Ishaq Dar had an uneasy relationship with the International Monetary Fund, and it is quite likely  that Dar would continue to pursue his old policies of keeping the rupee-dollar parity under control and flouting conditions of a new loan programme. However, to achieve economic stability and growth and continue to repay foreign debt without any interruption, the incoming administration will have to enter into a new programme after getting the last tranche of $1.1 billion under the ongoing standby arrangement.

For this purpose, tax reforms will have to be high on the agenda but taxing the agriculture and real estate sectors to increase revenue collection will be a problem as these sectors have political clout. People also expect that the new government will cut line losses and stop power theft, instead of increasing electricity and gas prices, to address the circular debt issue.

As things stand, political wrangling among the coalition partners will impede the pace of reforms, including privatization of state-owned entities. According to market watchers, inflation may decelerate in the coming months paving the way for the State Bank to cut policy rate which would support business and economic activities.

Media reports indicate that the business community is concerned about the split mandate and  the resulting political uncertainty, and apprehends further erosion in the rupee value. But since the elections are finally over, the market will expect  more bilateral and multilateral financing to come in and the early conclusion of the third IMF review, and next loan tranche disbursement soon after.

In the ultimate analysis, securing a new IMF loan programme and controlling inflation would be tough issues for the new government to tackle. Another key challenge is to maintain debt sustainability, in addition to restoring the confidence of foreign investors in the economy so that the country has access to capital markets and raise new financing through Eurobonds. All in all, much will depend on how deftly the new economic management team performs its tasks in the face of an uncertain political situation.