What are the key risks to Pakistan economy? The Ministry of Finance has outlined eight crucial financial risk factors that could worsen Pakistan’s economic situation in its Fiscal Risk Statement (FRS) for 2023-24.
What are the key risks to Pakistan economy?
These factors include:
- Macroeconomic imbalances
- Rising debt
- Guarantees
- Climate degradation
- State-owned enterprises (SOEs) losses
- Public-private partnership risks
- Provincial government’s fiscal indiscipline
- Governance challenges
The FRS notes Pakistan’s recent experience of volatile inflation due to currency devaluation and fluctuations in global energy and food prices.
The significant depreciation of the Pakistani rupee is attributed to various factors such as trade imbalances, external debt, political instability, and global economic conditions.
To counter rising inflation, the State Bank of Pakistan (SBP) has increased the policy rate, while the government is implementing policies to stabilize the economy.
However, concerns linger regarding the inflation outlook, posing risks to external stability. Uncertainties surrounding energy price adjustments add to these concerns.
The government’s strategy to combat inflation involves exchange rate adjustments, passing on energy price increases, and maintaining higher interest rates in the short term.
Efforts are underway to reduce the fiscal deficit by broadening the tax base, rationalizing subsidies, and fostering economic growth.
The FRS presents three scenarios to analyze fiscal risks, including potential reductions in non-tax revenues and lower-than-projected growth rates.
Additionally, the report addresses the challenge of mounting public debt, which has surpassed the prescribed limit of 60% of GDP under the FRDL Act.
External debt forms a significant portion of total public debt, exposing Pakistan’s fiscal position to risks associated with current account deficits and exchange rate fluctuations.
Furthermore, the FRS highlights risks associated with government guarantees, climate change vulnerability, and challenges in managing state-owned enterprises, public-private partnerships, provincial fiscal discipline, and governance.
The FRS underscores the necessity for comprehensive measures to address these financial risks and ensure the stability and sustainability of Pakistan’s economy amidst diverse challenges.
