Debt-to-GDP ratio to drop to 66.6% by FY27, growth to hit 5.5%: Ministry

November 25, 2024 (MLN): The public and publicly guaranteed (PPG) debt-to-GDP ratio is projected to decline to 66.6% in FY2027, down from 68.6% in FY2025, according to the Debt Sustainability Analysis FY2025-27 report issued by the Finance Division.

Meanwhile, real GDP growth is expected to rise from 3.6% in FY2025 to 5.5% in FY2027, driven by an improved external account balance and a recovery in the real sector.

Fiscal consolidation and growth-interest rate differential lead to a declining path of public debt to GDP ratio.

Based on the underlying assumptions in the baseline scenario, the public debt-to-GDP ratio stays below the prudent benchmark.

The GFN to GDP ratio is declining steadily from 25.4% in FY2025 to 19.5% in FY2027, reflecting a moderate risk to impact the debt dynamics over the medium term, the report added. 

Pakistan's economic and financial position has gradually improved in FY2024, attributed to prudent policy management and the resumption of inflows from multilateral and bilateral partners.

The country has successfully completed the IMF's Stand-By Arrangement (SBA) in April 2024, and entered in the new program of Extended Fund Facility in the first quarter of FY2025.

These positive developments increased the confidence of economic agents, leading to a boost in economic activity.

Moreover, to drive robust growth, the government is implementing sector-specific measures in agriculture, industry, and services, coupled with governance reforms.

The main focus is on investment and export-led growth. In this regard, the government is prioritizing private and foreign direct investment through SIFC, with a special focus on agriculture, minerals, information technology, telecom, and energy sectors to accomplish sustainable economic growth.

Over the medium term, inflation is projected to decrease from 12% to 7%. This decline will primarily be driven by exchange rate stability, improved production, and a reduction in global inflation rates.

Alongside this, the combination of optimal monetary policy, fiscal consolidation, and administrative measures is expected to play a key role in ensuring steady-state inflation.

The exchange rate has stabilized in FY2024 against the backdrop of a favorable current account balance, and is projected to be stable over the medium term.

The inflow of foreign exchange remained sound, structural reforms have been undertaken in the foreign exchange market, and the State Bank of Pakistan maintained a tight monetary policy stance; all these measures have supported the stability of the PKR.

Moreover, due to the continuity of these factors, a moderate exchange rate depreciation is projected over the medium term.

In alignment with the government's prudent fiscal management, the federal primary balance is projected to improve significantly during FY2025-2027.

The federal primary balance-to-GDP ratio is projected to increase to 1.02% in FY2025 and 0.5% in FY2027.

The increase in primary surplus is expected to be accomplished through tax revenue mobilizations and reducing non-essential expenditures by adopting a disciplined approach to achieve a reduction in fiscal deficit.

Over the medium term, attaining a positive primary balance underlines the government's commitment to a sustainable fiscal policy and its strategy towards ensuring debt sustainability.

The report further highlighted that the DSA has been performed in FY2024; therefore, the shock calibrations start in FY2025. The shocks under alternative scenarios are as follows:

To appreciate the government's efforts, the report highlighted that the government has adopted a multi-faceted strategy to maintain debt sustainability by diversifying borrowing sources and balancing costs and risks.

Key actions include extending the maturity of domestic debt, smoothing repayment schedules, and improving transparency in debt issuance.

The government plans to meet the financing need and reduce borrowing costs by introducing various financial instruments, availing concessional borrowing from diversified sources, tapping the international capital markets, and encouraging non-resident investment in government securities.

"Finally, sustainable economic growth increases the government’s capacity to manage its debt," the report reads.

The government is implementing home-grown structural reforms to achieve sustainable export-led growth by boosting productivity across all sectors, economic diversification, enhancing competitiveness, and fostering innovation and technological development, it informed.

Moreover, the government is committed to increasing private and foreign investment which is vital to boost economic growth and reinstate market confidence, it said.

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