According to the Finance Division, major economic indicator estimates are vulnerable to specific risks and vulnerabilities that could cause deviations from projections, as these risks can jeopardise achievement of the targets set under the Medium-Term Debt Management Strategy (MTDS).
The Division has posted “Medium Term Debt Management Strategy (fiscal year 2023-fiscal year 2026)” on its website, stating that the government intends to reduce the fiscal deficit from 7.9 percent of GDP in fiscal year 2022 to 3.1 percent of GDP by fiscal year 2026.
On the back of improving commodity-producing sectors (agricultural and industry), efficient monetary policy, and stronger fiscal discipline, inflation is expected to fall to roughly 6.5 percent per year by fiscal year 2026.
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Economic growth is expected to reach 5.5 percent per year by fiscal year 2026, with greater investor confidence, stable inflation, a reasonably valued exchange rate, improved current account balance, and improved fiscal and monetary management.
Over the medium term, decreased inflation rates are predicted to result in lower government borrowing costs. As a result, interest expenses as a proportion of GDP are likely to fall in the medium term, creating budgetary headroom, according to the report.
The Division did, however, point out that major economic indicator estimates are vulnerable to specific risks and vulnerabilities that could cause variations from projections. These dangers can jeopardise the achievement of the MTDS targets.
Lower tax collections result in larger fiscal deficits that must be covered by higher borrowings, as well as less fiscal room for development and social spending.
Over the next four years, the government intends to increase Federal Board of Revenue (FBR) revenues. Any failure to meet tax revenue collection targets will have a negative impact on the government’s projected budgetary condition. Climate change events may also have a negative impact on the macroeconomic framework.
A combination of elements, including reaching primary surplus, lowering the overall fiscal deficit, increasing GDP growth, and guaranteeing exchange rate stability, is critical to achieving debt sustainability.
The government has anticipated sufficient external financing to cover its budget deficit in the medium future. Any shortfall in foreign finance could jeopardise the country’s financial health as well as its general macroeconomic stability by putting additional borrowing pressure on local markets.
Aside from the crowding-out effect, large domestic borrowing requirements make domestic markets vulnerable to macroeconomic shocks. Expectations of further inflation and high interest rates might upset domestic markets, negatively impacting the government’s liquidity management and borrowing costs.
The government has a cash buffer on hand to handle unanticipated liquidity needs caused by cash flow mismatches and/or other eventualities. According to the research, proactive cash management is required so that the government may assist in mitigating risks to financial stability in the event of severe shock scenarios such as natural calamities.
According to the source, the government is also considering issuing inflation-linked bonds. These instruments are preferred by insurance companies, pension funds, and mutual funds for liability management. In addition, the government may explore listing and trading Government Securities on the stock exchange to facilitate investor outreach.
The report also stated that, in terms of currency risk, the maximum benchmark of external debt in total public debt is established at 40%. This ratio has risen in recent years due primarily to exchange rate depreciation rather than excessive external borrowings.
The administration intends to minimise the share of external debt in overall public debt in the medium term.
