Deliberations on Fiscal Restraint Measures
Amidst pressing apprehensions surrounding the official budget deficit target, a Economic Committee convened to discuss potential actions aimed at fiscal stability. The talks primarily focused on addressing unforeseen expenditure linked to interest payments.
Development Spending Under Scrutiny
The committee deliberated on the possibility of implementing tighter financial measures, including curbing development spending, particularly expenses allocated to provincial initiatives. This strategic approach seeks to counterbalance budgetary pressures.
Subsidy Reductions and Private Sector Growth
During the inaugural meeting of the Cabinet Committee for Economic Revival (CCoER), interim Finance Minister Dr. Shamshad Akhtar expressed opposition to extending further subsidies to various endeavors, including information technology projects. Instead, she urged members to present proposals fostering growth driven by the private sector.
Inflation Concerns and Collaborative Strategy
The committee extensively discussed the impending challenge of inflation, set to escalate due to surging electricity and fuel prices, compounded by continuous rupee devaluation. Recognizing the gravity of the situation, the cabinet body called for collaborative efforts between the central bank, Ministry of Planning, and provincial entities to formulate a joint strategy aimed at mitigating inflationary expectations.
Challenges and Mitigation
Against the backdrop of ongoing currency devaluation and increased energy costs, the committee acknowledged the likelihood of sustained inflation throughout the year, with exchange rate volatility being an inherent concern.
Budgetary Targets and Underlying Risks
Amid fiscal ambitions, the current fiscal year’s target for the federal budget deficit, set at Rs7.6 trillion or 7.2% of GDP, faces potential challenges due to underestimations in interest payments. The committee underscored the importance of fiscal stabilization while addressing potential deviations in expenditures through rationalizing public sector development spending.
Suggested Pause on Provincial Projects
To counterbalance any potential excessive expenditures, committee members suggested halting federal-government-funded provincial projects for the current fiscal year. The government had allocated Rs950 billion for development spending this year.
Balancing Goals and IMF Agreement
Established by the interim prime minister, the committee’s mandate is to offer recommendations for economic revitalization in the short-to-medium term. However, these objectives appear to conflict with the fiscal stabilization goals outlined in the $3 billion International Monetary Fund (IMF) agreement.
Debt Escalation and Financing Dynamics
Pakistan’s federal government debt surged to Rs61 trillion, accounting for 72% of GDP by June 2023, a staggering addition of Rs13 trillion in FY23. This growth stems from various factors, including primary budget deficit-related increments and the impact of currency devaluation.
Navigating Financing and Risk Management
This fiscal year’s estimated budget deficit of Rs6.9 trillion is set to be financed through a combination of domestic and external borrowing. However, the feasibility of the $6 billion budgeted commercial borrowing, given current sovereign ratings and global interest rates, is under scrutiny.
Potential Consequences and Credit Dynamics
As the deficit and potential funding gaps loom, reliance on domestic bank financing could intensify, potentially constraining private sector credit. The State Bank of Pakistan’s loans to commercial banks have risen significantly, amplifying financial complexities.
Inflation and Interest Rates
Balancing government expenditure and interest rate reductions is a challenge. Despite the desire for reduced rates, prevailing inflation trends make a rate reduction unlikely.
Credit Trends and Economic Outlook
The credit landscape has experienced fluctuations, with credit to the private sector declining while credit to the government and Public Sector Enterprises (PSEs) increased. Efforts are underway to drive growth in the private sector.
Mitigating Inflation Impact
As inflation escalates, strategies are devised to navigate the associated challenges, ensuring a balanced economic environment.
External Factors and Exchange Rate Dynamics
The volatility in exchange rates is attributed to factors such as imports, remittances, exports, and the resulting current account deficit.
The committee’s deliberations and decisions reflect a dynamic effort to navigate complex economic challenges while striving to achieve fiscal stability and balanced growth.