Debt sustainability: Elevated gross financing needs constitute high risk: IMF

ISLAMABAD: The International Monetary Fund (IMF) has said that elevated gross financing needs continue to pose high risks to debt sustainability, particularly as fiscal and reserve buffers have been depleted.

The staff commentary on debt sustainability assessment (DSA) in its report prepared for consideration of the IMF Executive Board following first review of the Stand-by-Arrangement (SBA) stated that public debt continues to be assessed as sustainable in the baseline scenario underpinned by steadfast implementation of the proposed SBA policies, with tax measures introduced as part of the FY23 budget assumed to persist beyond the program horizon, a macro framework which does not assume either additional primary consolidation or expansion beyond FY24, and the gradual resumption of growth in the coming years.

Elevated gross financing needs continue to pose high risks to debt sustainability, particularly as fiscal and reserve buffers have been depleted. In this regard, timely disbursements of committed bilateral and multilateral support are critical in the period ahead.

Higher interest rates, a larger-than-expected growth slowdown due to policy tightening, pressures on the exchange rate, renewed policy reversals, slower medium-term growth, and contingent liabilities related to SOEs pose significant risks to debt sustainability.

The overall risk of sovereign stress is high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers. Risks are mitigated by the fiscal adjustment safeguarded under the SBA and continuing onto the medium term, financial commitments by bilateral partners, and the ability of the banking system to rollover existing domestic debt.

Medium-term risks are assessed as high (in line with the mechanical signal). Risks include uneven program implementation, political risks, and access to adequate multilateral and bilateral financing in view of the high gross financing needs.

In the long run, insufficient progress with policies and structural reforms could hamper potential growth, yet with its relatively young population Pakistan also bears great potential through leveraging digital technologies.

Pakistan is also very exposed to the adverse consequences of climate change, such as more frequent floods and droughts, and the necessary adaptation costs would slow the reduction of debt and financing requirements.

The IMF in the report said that Pakistan continues to face serious challenges, including those associated with the political transition, increasing geo-political conflicts, elevated external risks, and climate vulnerabilities.

Copyright Business Recorder, 2024