Unsustainable public debt position one of biggest economic challenges: Dr Shamshad

It is imperative that new govt completes last review of IMF SBA

ISLAMABAD   -  Caretaker Federal Minister for Finance and Revenue Dr Sham­shad Akhtar has said that at the heart of the economic challenges facing Pakistan is the unsustain­able public debt position, with Pakistan in breach of the Fiscal Responsibility & Debt Limita­tion Act (FRDL) since 2013.

“The government’s ability to service the public debt lia­bilities are hampered by weak tax collection, rising losses of SOEs, and highest interest rates since 1972,” the minister said in monthly report issued by the ministry of finance.

She said the improvement in the fiscal position and oth­er quantitative and structural benchmarks led to the successful first review of the IMF SBA in No­vember 2023, and subsequent disbursement of $700 million in January 2024. The measures taken to conclude the IMF staff review included the annual re­basing of power tariffs, the semi-annual gas tariff adjustment, and the SOE Policy to enhance gov­ernance and improve financial performance. A comprehensive Circular Debt Management Plan (CDMP) was enforced that fo­cused on reforms to reduce high costs, improve DISCO perfor­mance, and increase competition and green energy.

Finance minister noted that headline inflation has remained persistently high, but we antici­pate a significant fall in inflation in 2024 due to the economic mea­sures taken by the caretaker gov­ernment including improvement in the supply of imports of raw materials, higher food production, and stability in the exchange rate market. Assuming no exogenous shocks, including a rise in interna­tional oil prices, the SBP projects inflation to fall to 5% to 7% range by FY2025. During the month of Feb 2024, the weekly SPI inflation has declined to 30.7% compared to 44% in Jan 2024.

Turning to the markets, she said the premium between interbank and open market was brought down to less than 0.5%, against the agreed 1.25% range. SBP FX reserves were raised to $8.1 bil­lion, compared to $4.4b in June 2023, while reducing the swaps from commercial banks to $3.5 billion, from $ 4.5b in June 2023.

She said that the markets have rallied due to improvements in the economic conditions and the PSX has rallied 40% from Sep with the KSE 100 index ris­ing to 63,300 points by 26 Feb. Foreign buyers have invested $51.7 million in the PSX during FY2024, after 4 years of outflow. During the period, the rupee has strengthened 8% to 280 levels.

The risk premium (Credit De­fault Swaps) on the Eurobonds has come down sharply to 1,534bps in Feb 2024, compared to 4,825bps in June 2023.

To sustain these gains, it is imperative that the new govern­ment completes the last review of the IMF SBA. Perhaps more im­portant is that the new govern­ment reach an early agreement with the IMF staff on a new me­dium-term facility, providing an anchor to carry out the difficult reforms. To achieve this, the new government must take forward critical reforms on restructuring of the FBR, privatization of the loss-making SOEs including PIA, and the implementation of the SOE policy for improved gover­nance and financial performance.

According to the minister, as the new government takes office after the 8 February general elec­tions, expectations are that a vi­brant strategy and vision would help revive the economy and build on the hard-earned gains made over the last six months. Last few months measures have restored market confidence and led to a pick-up in economic ac­tivity. GDP growth accelerated to 2.1% in Q1 FY2024, after two consecutive quarters of negative growth. The growth was broad-based with the agriculture sector posting 5% growth and manu­facturing activity registering 2.5% growth. In particular, the removal of the import ban and other import restrictions have eased supply constraints, lead­ing to pick-up in economic ac­tivity. Data from Q2 FY2024 is showing stronger performance of the manufacturing sector, with large scale manufacturing post­ing 8.2% increase over Q1. We expect Q2 FY2024 GDP growth to rise to around 3% on stronger manufacturing output and high­er production of crops including cotton, which has increased by 75% to 8.35 million bales.

To tackle these challenges, the caretaker government has taken steps to reduce unproductive expenditures and boost tax and non-tax income. During Jul-Dec FY2024, the government has run a primary surplus of Rs 1.5 tril­lion (1.4% of GDP) against IMF SBA target of 0.5% of GDP.

Difficult and unpopular mea­sures including a reduction in the subsidy bill on power and gas through timely implementa­tion of quarterly tariffs helped improve primary account. No supplementary grants have been issued during this period and PSDPprojects that fall under the provincial domain have been transferred to provincial ADPs.

At the same time, we have increased the release of funds for 9.3 million most vulner­able households. On the revenue side, the FBR tax collection grew by 30% to Rs 5.15 trillion during Jul-Jan FY2024 despite a slow­down in imports and 0% GST on petroleum products.

Overall growth in the domes­tic taxes has increased by 40%, with the rebound in economic activity and rise in profitability of companies including Banks, Oil & Gas, and the manufacturing industry. Import taxes posted a growth of 16% due to improve­ments in the valuation of im­ports that yielded Rs 151 billion in collections as well as the anti-smuggling drive that witnessed almost 69 % growth in FY2024.

The improvement in the fiscal position has helped the govern­ment to reduce the accumula­tion of public debt. Net domes­tic borrowing has decreased by 67% to Rs 1.9 trillion, from Rs 5.8 trillion in the preceding pe­riod. The lower domestic bor­rowing, lower cost of borrowing on margin (below the SBP policy rate) and extended maturity profile helped lower net domes­tic borrowing. Most of all the domestic debt profile has im­proved to 3.1 years in Jan 2024, from 2.7 months in Jun 2023. The government also success­fully launched a 1 year Sukuk on the PSX, the first auction was held in November 2023, raising lower-cost debt from non-bank and retail investors. Similarly, external net borrowing during fell to $ 0.3 billion, compared to $ 3bn in the preceding period.

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