Pakistan’s finance ministry outlines fiscal challenges in annual risk report

ISLAMABAD: Pakistan’s finance ministry released the Fiscal Risk Statement FY2023-24 on Wednesday, providing an overview of potential risks and uncertainties that could impact the country’s fiscal outlook in the coming years.
The ministry is legally bound to prepare the statement under the Public Finance Management Act, 2019, which requires the annual budget to mention fiscal risks.
Pakistan’s economy has faced multiple challenges in recent years, affecting the economic growth and fiscal deficit.
The government has implemented several economic reforms to contain fiscal deficit and make the key sectors more efficient to attract more investment in the country.
However, this has also increased the inflationary pressure in the economy, with food prices touching record high levels in recent months.
“The inflation outlook has deteriorated, and there is heightened risk to external stability,” the ministry while specifying a key macroeconomic challenge. “The uncertainty surrounding the future adjustment path in energy prices is the main upside risk to the inflation outlook.”
However, the ministry said a potential moderation in international commodity prices was expected to contribute to a reduction in inflation in the country.
It also mentioned Pakistan’s debt problem as yet another risk factor.
“External debt constitutes 40.8 percent 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,” it said.
“Ongoing fiscal deficits require refinancing of the Government’s maturing debt while raising additional debt to fulfill the fiscal shortfall. A high level of short-term debt creates potentially significant refinancing challenges during periods of slower economic growth, higher fiscal deficits, and/or lower investor confidence,” it added.
The report warned that climate and natural hazard events could pose challenges to the government’s fiscal risk position.
The ministry recommended a restrictive monetary policy through higher interest rates, both to reduce inflation and help address external imbalances.
It also advocated for measures to improve the business environment by creating a fair and level playing field for the organizations to increase investment and trade.