ISLAMABAD: Fiscal discipline is essential to maintain primary surplus as total public debt/revenue and debt service/revenue ratios remain high and need to be brought down to more sustainable levels.
The Finance Division’s ‘Fiscal Risk Statement for Fiscal Year 2023-24’ noted that prudent debt management is necessary to avoid negative effects on monetary and fiscal operations, as well as the external account.
A balanced approach to debt management is necessary to ensure that Pakistan can continue to finance its development and growth objectives while maintaining financial stability.
Public debt stands at Rs59,247bn in March
With the objective to effectively manage domestic debt, it is necessary to bridge the gap between revenues and non-interest expenditure and to reduce or generate a primary surplus.
Since fiscal year 2018, higher primary and fiscal deficits along with lower revenue growth have resulted in higher total public dent.
The first three quarters of the fiscal year 2023 have resulted in an overall primary surplus of Rs504 billion, associated with the rolling back of some subsidies related to the energy sector and petroleum products. To ensure a decline in external debt to foreign exchange earnings (FEE) overtime, it is crucial to maintain a nil (zero) current account deficit before interest payment and have higher growth in FEE compared to the interest rate paid on external debt.
The stock of guarantees stood at 4.5 percent of GDP in the fiscal year 2022. Guarantees issued against commodity operations are not included in the estimated stock now in annual limits imposed on new issuances, on the basis that the loans are secured against the underlying commodity and are essentially self-liquidating.
These guarantees are issued against the commodity financing operations undertaken by the TCP, the Passco, and the provincial governments.
The outstanding stock of commodity operations was Rs1,134 billion at end June 2022.
A fiscal risk arises from the fact that a significant part of commodity operations lacks underlying collateral due to issues such as theft of commodities, unpaid subsidies, and wastage during storage.
The Fiscal Responsibility and Debt Limitation Act, 2022, imposes a limit on the issuance of new government guarantees, including rollovers of existing guarantees to two percent of GDP per annum and 10 percent of GDP limit on guarantees stock.
One of the key drivers of state-owned enterprises (SOEs) fiscal risk, arises from the absence of a clear and comprehensive framework for public sector obligations (PSOs), which would allow SOEs to be properly compensated for undertaking quasi-fiscal activities.
Copyright Business Recorder, 2023
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