In Islamabad, Finance Minister Dr. Shamshad Akhtar expressed deep concern over the escalating cost of interest payments, describing it as a significant challenge to fiscal stability. During the first quarter of the current fiscal year, the expenses related to servicing the national debt almost consumed the entire net federal income, which amounted to Rs1.4 trillion.
In her introductory remarks for the Monthly Economic Outlook report for October issued by the finance ministry, Akhtar acknowledged the commencement of economic recovery and a reduction in inflationary pressure. The ministry anticipated a drop in the inflation rate to 27% in October, down from September’s 31.4%.
She emphasized the rising cost of servicing public debt as a primary concern, attributing it to the surge in SBP policy rates to 22% and the depreciation of the Pakistani Rupee (PKR). Debt servicing costs had surged by 45% during the first quarter, reaching Rs1.4 trillion, nearly equaling the net federal income after provincial shares were disbursed.
This assessment was made just days before the commencement of the first review discussions with the International Monetary Fund (IMF), where budgetary expenditures on debt servicing were expected to be a key topic.
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Pakistan currently finds itself in an unsustainable debt situation, resorting to further borrowing not only to meet interest costs but also to repay principal debt. Debt restructuring is a necessary step, though past governments have been reluctant to take it due to political repercussions.
Akhtar noted that despite the increase in debt servicing costs, the government managed to control expenditure growth by reducing untargeted subsidies and minimizing spending on new projects and schemes under the Public Sector Development Program (PSDP).
Public sector development spending was slashed by 30% to just Rs53 billion, and subsidies amounted to only Rs2.5 billion.
The report emphasized that the challenge of higher interest payments will continue to test fiscal consolidation efforts. Prudent management of expenditure has resulted in limited growth in non-interest spending, helping maintain a surplus in the primary balance, signifying improved fiscal management.
The report, prepared by the economic advisor wing of the finance ministry, features Akhtar’s introduction, marking her ownership of the report. She highlighted the positive momentum in high-frequency economic indicators, indicating the translation of hard-earned gains in fiscal and external accounts into an economic uptick. The Monthly Economic Indicator (MEI) for September 2023 recorded the third consecutive month of positive gains, reflecting growing economic activity.
The report expected the MEI to remain positive throughout the fiscal year, driven by a rebound in domestic economic activities. It mentioned that GDP growth prospects had improved, with positive trends in manufacturing activity and a brighter outlook for agricultural output.
Data revealed a 2.5% growth in the manufacturing sector in August, ending a 14-month downturn. Factors contributing to the economic recovery included the removal of import restrictions, resolution of outstanding letters of credit, and improved dollar liquidity due to increased SBP FX reserves.
The revival in manufacturing was broad-based, with gains observed in the export sector, construction activity, and consumer goods. In agriculture, cotton production is estimated to increase by 127% to 11.5 million bales for 2023-24, compared to the previous year. Rice production is also expected to rise by 18%.
For the Rabi crops of 2023-24, the outlook is positive with satisfactory seed availability, stable urea and DAP supplies, although there may be a 15% water shortage for Punjab and Sindh. However, prevailing weather conditions are manageable.
Regarding inflation, the ministry anticipated better containment compared to the elevated levels observed in the first quarter. The projection for October 2023 ranged from 27% to 29%.
The Ministry of Finance reported that inflation is expected to decline significantly in October, primarily due to reductions in fuel prices, stabilization of certain major food commodity prices, and a favorable base effect. The government had reduced petrol and diesel prices due to lower global crude rates and a stronger domestic currency.
During the first three months of the current year, the current account deficit (CAD) decreased by 58% to less than a billion dollars. The finance ministry projected the CAD to stabilize at around $6.5 billion or 1.5% of GDP for the current fiscal year, as trade and investment flows return to normalcy.
In terms of exports, the report expected goods and services exports to remain at around $3 billion for October 2023, with a gradual increase in the following months as large-scale manufacturing (LSM) indicates signs of improvement.
