Ministry Identifies Key Economic Risks for Pakistan


In a comprehensive assessment, the Ministry of Finance has pinpointed eight critical fiscal risks posing potential threats to Pakistan’s economy. These risks span macroeconomic imbalances, escalating debt levels, guarantees, climate degradation, State-Owned Enterprises (SOEs) losses, public-private partnership risks, provincial fiscal indiscipline, and governance challenges.

Released in the Fiscal Risk Statement (FRS) for 2023-24, the Ministry underscores the volatility in Pakistan’s inflation rate, influenced by factors such as currency devaluation, global energy prices, and food costs. The depreciating Pakistani rupee, driven by trade imbalances, external debt, and geopolitical instability, exacerbates inflationary pressures. To counter this, the State Bank of Pakistan (SBP) has embarked on a proactive approach by adjusting policy rates, while the government implements policy and relief measures to stabilize the economy.

However, the inflation outlook remains precarious, posing risks to external stability. Uncertainties surrounding energy price adjustments loom large as an upside risk to inflation. Conversely, a potential moderation in international commodity prices could alleviate inflationary pressures. The government’s strategic measures, including exchange rate adjustments and interest rate management, aim to mitigate these risks and foster macroeconomic stability in the medium term.

Efforts to curtail the fiscal deficit by broadening the tax base, rationalizing subsidies, and stimulating economic growth face challenges, particularly in managing escalating debt servicing obligations. The Ministry outlines three simulated scenarios to analyze fiscal risks, emphasizing the importance of sustainable fiscal policies amid rising debt burdens.

Over the past half-decade, Pakistan’s public debt has surpassed the prescribed limit of 60% of GDP, driven by persistent fiscal deficits. External debt, constituting a significant portion of the total debt, exposes the government to vulnerabilities, especially in the face of current account deficits and dwindling foreign exchange reserves. Managing refinancing challenges and maintaining a longer average time to maturity (ATM) for debt instruments are crucial to mitigating these risks.

Additionally, the Ministry highlights risks associated with guarantees, climate change impacts, and governance challenges, urging proactive measures to address these systemic vulnerabilities.

As Pakistan navigates these multifaceted risks, prudent fiscal management and targeted policy interventions are essential to safeguarding economic stability and resilience in the face of evolving challenges.

Story by: Mehtab Haider

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