Govt Bets Big on Inflation, Debt Levels to Ease While Numbers Paint Bleak Picture

The risks to Pakistan’s public debt remain high in the next few years, while inflation is estimated to rise further in the ongoing fiscal year (FY) 2022-23 before cooling down by FY26.

The Economic Advisor’s Wing (EAW) of the Ministry of Finance said in its Debt Sustainability Analysis report that negative shocks of the exchange rate would increase the public debt ratio to levels persistently above the 70 percent threshold of GDP until FY25-FY26.

Gross financing needs remain high, posing several liquidity risks mainly due to high-interest rates and pressures on the external account. However, it is on a downward trajectory and is expected to decline in the medium to long term.

Within domestic debt, the rollover of T-bills is an important component while considering the debt risks, especially during a high-interest rate environment. Within external debt, the government is striving to refinance its short-term bank loans with longer-term maturities. Any unexpected shortfall in external financing may burden the domestic debt market, according to the report.

The total public and publicly guaranteed debt increased by 7 percent to Rs. 55.8 trillion by the end of December 2022, according to the report. This increase was primarily driven by the rising burden of interest rates and the rupee’s depreciation. Notably, over 37 percent of total debt is external, making it especially vulnerable to rupee depreciation.

The report says the government is committed to ensuring the financing of the federal fiscal deficit through diversified sources of borrowing basket via the introduction of new instruments in the domestic market and availing maximum external concessional financing.

Key Assumptions

Real GDP growth is projected at o.8 percent in FY23 on account of catastrophic floods, tight monetary stance, fiscal consolidation, and a non-conducive global economic environment. Over the medium term, growth rate recovery is expected, achieving 5.5 percent in FY 2026.


Inflation, measured as CPI, is expected to rise in FY2023 to 28.5 percent on average due to an uncertain political and economic environment, pass-through of currency depreciation, and the rise in energy prices. Over the medium term, inflation is projected to trend down from 7.5 to 6.5 percent.

The stabilization of the exchange rate is also projected. In FY 2024, a better crop outlook due to several measures taken in the agriculture sector especially the Kissan Package, political stability, and the stable exchange rate would help to achieve price stability. The inflation rate will be normalized in the medium term due to the high base effect as well as improvement in the commodity-producing sector and favorable global factors.

Given the global situation, the government admits that reducing the current inflationary pressures will take some time and should not be done at the expense of recession. However, the actions implemented should steadily lower the inflation rate’s future course to 6.5 percent by FY26, which is more in accordance with steady and sustainable economic growth, says the report.

“The government is committed to laying a strong foundation for the economy over the medium term through growth in exports, with a focus on increasing agriculture, IT, and industrial exports, increasing exports’ competitiveness, improving agricultural productivity, improving the ease of doing business to attract both domestic and foreign investors, strengthening resource mobilization, creating better job opportunities, strengthening social safety nets and human capital development. The overall goal is to build a structure of highly inclusive and sustainable growth,” read the report.

Debt Profile

It also says that the underlined financing assumptions align with the objectives and targets of the medium-term debt management strategy (FY20-FY23), aiming to lengthen the maturity profile, develop the domestic debt market, transparency in borrowing operations, diversification of investors base, increased issuance of shariah compliant instruments, accessing concessional external financing, and ensuring presence in international capital markets.

In consideration of the above, the report mentioned that the government is required by the Fiscal Responsibility and Debt Limitation Act to reduce the debt-to-GDP ratio to 55.2 percent by FY26.

Even if no shocks occur in the future, the report predicts that the public and publicly guaranteed debt-to-GDP ratio will reach 63 percent in FY26, with guarantees accounting for 3.1 percent of GDP. Understandably, Pakistan’s public and publicly guaranteed debt-to-GDP ratio is currently 78 percent, making it impossible to reduce it by nearly one-third in four years.

Pertinently, the assumption of “exchange rate stabilization” is included in the report. However, it may not be realized given the prevalent uncertainty in the country.

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