ISLAMABAD: The estimates of key economic indicators are prone to certain risks and vulnerabilities that could cause deviations from the projections, as these risks can undermine the achievement of the targets set under the Medium-Term Debt Management Strategy (MTDS), says the Finance Division.
The division has uploaded “Medium Term Debt Management Strategy (fiscal year 2023-fiscal year 2026)” on its website, which stated that government intends to reduce budget deficit from 7.9 per cent of GDP in fiscal year 2022 to 3.1 per cent of GDP by fiscal year 2026.
Inflation is projected to decline to around 6.5 per cent per annum by fiscal year 2026 on the back of improved commodity-producing sectors (agriculture and industry), effective monetary policy, and stronger fiscal discipline. With increased investor confidence, stable inflation, fairly valued exchange rate, improved current account balance and better fiscal and monetary management, economic growth is projected to reach 5.5 per cent per annum by fiscal year 2026.
Over the medium term, reduction in inflation rates is expected to result in lower borrowing costs for the government. Accordingly, the interest expenditures as percentage of GDP are expected to reduce over the medium-term which will create fiscal space, it added.
The Division; however, noted that the estimates of key economic indicators are prone to certain risks and vulnerabilities that could cause deviations from the projections. These risks can undermine the achievement of the targets set under the MTDS.
Lower tax revenues lead to greater fiscal deficits that need to be financed through higher borrowings and also reduce fiscal space for expenditure pertaining to the development and social sectors.
The government is targeting higher growth in Federal Board of Revenue (FBR) revenues over the next four years. Any shortfall in the achievement of targets in tax revenue collection will have adverse consequences for the projected fiscal position of the government. Impact arising from climate change events may also adversely affect the macroeconomic framework.
A combination of factors including achieving primary surplus, lowering the overall fiscal deficit, attaining higher GDP growth, and ensuring stability in the exchange rate are fundamental to achieving the goal of debt sustainability.
The government has projected sufficient external financing over the medium term for financing of its budget deficit. Any shortfall in external financing may pose a risk to fiscal health, as well as, the overall macroeconomic stability of the country by putting additional borrowing pressure on domestic markets.
Apart from the crowding-out effect, large domestic borrowing needs make the domestic markets susceptible to macroeconomic shocks. Expectations of continuing inflation and high-interest rates can disrupt the domestic markets with adverse implications for the government’s liquidity management and cost of borrowing.
The government is maintaining a cash buffer to meet unexpected liquidity requirements on account of cash flow mismatches and/ or other contingencies. Proactive cash management is necessary so that government can provide support in managing risks to fiscal stability in case of adverse shock scenarios such as natural calamities, the report noted.
The report noted that the government is also exploring the introduction of inflation-linked bonds. Insurance companies, pension funds and mutual funds prefer to buy these instruments for their liability management. Further, the government may also consider listing and trading of government securities through stock exchange to support investor outreach.
The report further noted that in relation to the currency risk, the maximum benchmark of external debt in total public debt is set to be 40 per cent. In recent years, the increase in this ratio was attributable mainly to exchange rate depreciation rather than excessive external borrowings. Over the medium term, the government will aim to reduce the share of external debt in total public debt.
Copyright Business Recorder, 2023