May 11, 2022 (MLN): Pakistan’s economic challenges are widening. There is a growing apprehension that the budget deficit will rise to a record level in 2021-22.
Dr Hafiz Pasha, in his research note written for Next Capital, explained the factors behind the soaring budget deficit.
The petroleum levy was expected to generate Rs610 billion in 2021-22. The upsurge in international prices of petroleum products has led to a withdrawal of the levy. The estimated yield now is Rs130 billion, implying a big shortfall of Rs480 billion, he said.
The policy rate was 7 percent at the time of the presentation of the budget. It has since increased to 12.25 percent. This will add Rs450 billion to the budgeted level of debt servicing in 2021-22. Subsidies are likely to be higher by Rs 300 billion because of the relief package, he added.
Although FBR revenues have shown rapid growth of over 29 percent up to March, there is likely to be a shortfall of Rs100 billion in relation to the annual target which has been enhanced from Rs5829 billion to Rs6100 billion.
As per the note, the government’s revenues are projected to clock in at Rs4 trillion in FY22 against the government’s estimate of Rs4.5 trillion. The expenditures are projected to settle at Rs8.89 trillion.
The consolidated budget deficit is expected to reach the level of Rs4.229 trillion equivalent to 7.7 percent of the GDP in 2021-22. This is likely to be the outcome even after a cut in the federal PSDP of Rs 300 billion. There will be a primary deficit of 1.3 percent of the GDP.
The budget deficit could be even higher if supplementary grants are made to reduce the circular debt, the report noted.
On the debt front, Pakistan’s domestic debt reached Rs27.7 trillion during July-Feb FY22, while external debt stood at Rs15 trillion. This led Pakistan’s total debt to clock in at Rs42.7 trillion as against Rs38.7 trillion recorded at the end of June 2021.
This seems that there has been only a minor change in the government debt to GDP ratio up to February 2022, which remains close to 81 percent of the GDP.
The depreciation in the value of the rupee has contributed 42 percent to the increase in the absolute size of the debt, the report underlined.
While reviewing the 3Q of FY22, Hafiz Pasha said that the economy of Pakistan is increasingly mired in a difficult situation with the economy approaching ‘stagflation.
The rate of inflation has remained double-digit throughout the third quarter of 2021-22. The initial optimism that the GDP rate would rise above 5 percent has given way to the more modest expectation that it will remain closer to 4 percent.
The world economy had continued to demonstrate a strong recovery at the beginning of 2022 and international commodity prices had maintained a rising trend. There was optimism that the global economy would show a high growth rate of over 5 percent in 2022.
The commencement of the Russia – Ukraine war has dampened expectations, he said, adding that the large-scale supply disruptions due to the sanctions imposed on Russia have contributed to further escalation in commodity prices, especially of oil.
The price of crude oil initially jumped to $130 per barrel and has since stabilized at close to $105 per barrel. The end of the third quarter has been followed by a change of government in Islamabad.
He anticipated that the pressure of high international commodity prices is likely to persist due to supply shortages arising from the sanctions against Russia and the balance of payments of Pakistan could continue to show a deficit.
The IMF in its latest World Economic Outlook has forecast a sharp fall in the growth rate of the world economy. Inflation rates in countries like the USA and the UK have risen sharply. Increasingly, there is a resort to tighter monetary and fiscal policies.
These developments could limit the growth of Pakistan’s exports and increase the cost of accessing sources of international finance. The short-term outlook for the value of the rupee and the level of share prices hinges crucially on the progress in reviving the IMF program and thereby improving access to multilateral lenders like the World Bank and the ADB.
Apparently, following recent meetings in Washington, the process of the Seventh Review has been extended. The new government may also try and obtain deposits from friendly countries, but this may prove more difficult given the state of Pakistan’s creditworthiness, he stated.
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