The government expressed concern on Wednesday that the gross financing requirements would remain high, posing several liquidity risks due to high interest rates and pressure on the external account with average inflation at 28.5% this year and stubbornly remaining at 21% even in the upcoming fiscal year. This concern came as major debt sustainability indicators declined over the first half of the current fiscal year (July-December). In this regard government has lowered the growth rate to an alarming 0.8 percent.
In its “Debt Sustainability Analysis (DSA) Report,” the Economic Advisory Wing of the Ministry of Finance stated on Wednesday that “public debt risks remain high.” Since the debt- and GFN-to-GDP ratios (gross financing requirements to gross domestic product) above the IMF’s DSA levels in FY23, both in baseline and shock scenarios, the heatmap shows a significant risk, it stated.
The stress-test study revealed that the most extreme scenario, negative exchange rate shocks, would push the public debt ratio permanently above the 70 percent of GDP threshold until FY26. A debt-to-GDP ratio above 70% is the result of the macro-fiscal and standardised contingent liability shocks combined. In addition, the government for the first time forecasted GDP growth at 0.8 percent instead of the budgeted 5 percent, which was the range predicted by the IMF, World Bank, and Asian Development Bank.
The report acknowledged that due to the unstable political and economic situation, the transmission of currency devaluation, and the increase in energy prices, inflation, as measured by the CPI, was anticipated to grow to an average of 28.5 percent in FY23 and then remain at that level in the following fiscal year. In contrast, MOF predicted that over the longer term, inflation will trend downward from 7.5 to 6.5pc given expectations for a stable currency rate, improved crop prospects, political stability, and a large base effect.
“Given the global situation, the government admits that reducing the current inflationary pressures will take some time and should not be done at the expense of recession”, it read.
According to the report, the total public and publicly guaranteed debt was Rs55.8 trillion in December 2022, which is 7 percent more than it was at the end of FY22. This increase was attributed to the rising interest burden brought on by the high interest rate environment as well as the 11 percent depreciation of the Pakistani rupee against the US dollar that occurred in 6MFY23.
62.8 percent of the entire state debt was domestic, and the rest was external. Domestic debt included floating debt (short-term), permanent debt (medium- and long-term), and unfunded debt (mainly made up of various instruments offered through the National Savings Schemes). Permanent debt included medium- and long-term. On the other hand, 37.2 percent of the total governmental debt is foreign debt, which is held by commercial entities, bilateral creditors, and multilateral development partners.