ISLAMABAD: The Ministry of Finance has said debt servicing will pose significant challenges as over 91 per cent of all expenses are interest payments.

In a monthly report on the state of economy, the ministry expressed the hope that nascent economic activities would remain better throughout the fiscal year.

“On the expenditure side, higher markup payments will continue to pose significant challenges for fiscal consolidation efforts,” said the Monthly Economic Update & Outlook report for October released by the ministry’s Economic Advisor’s Wing on Tuesday.

In her foreword, caretaker Minister for Finance Dr Shamshad Akhtar also called the cost of servicing public debt a “primary concern”.

Govt working on securing $6.3bn from multilateral, $10bn from bilateral sources

The 22pc policy rate of the State Bank of Pakistan and the weaker rupee was fueling the rise in servicing costs, she said. “Debt servicing costs increased 45pc in Q1 to Rs1.4 trillion.

The minister claimed that despite high servicing costs, overall expenditure didn’t grow exponentially due to “a prudent reduction in untargeted subsidies and a reduction in spending on new projects and schemes under the PSDP”.

As per the report, the total expenditures grew by 20.1pc Rs 1.58tr during Q1 of FY2024 — July to August — against Rs 1.32tr last year.

“Higher markup payments continued to be the major source of increase in current expenditures, as it grew by 63.5pc during Jul-Aug FY2024.”

The report expected the outlook for the remaining fiscal to be “encouraging” due to a substantial increase in net federal revenues, primarily driven by a sharp rise in non-tax collection.

“[The] higher-than-expected tax collection in the first quarter of FY2024 highlights the effective implementation of new tax measures, the moderate revival of economic activities, and efficient tax administration.”

As per the outlook, long-term fiscal sustainability would be achieved through expense management — rationalising expenditures through austerity measures, reducing subsidies and grants, increasing revenues and tax collection and removing tax exemption.

Positive results

The quarter showed development and stabilisation measures taken by the government led to positive results in the form of industrial growth and higher crop output.

The production of cotton and rice has posted a growth of 126.6pc and 18pc, respectively, for 2023-24.

Similarly, large-scale manufacturing increased by 2.5pc and 8.4pc on a year-on-year and month-on-month basis, respectively. In July, it had shrunk by 3.7pc MoM.

The external account also showed improvement, as per the report and “foreign exchange buffers were being built up.”

In the first three months of the fiscal year, the current account deficit declined by 58pc to $0.95bn. The full-year projection is around $6.5bn (1.5pc of GDP) due to the normalisation of trade and investment flows.

With SBP reserves at around $7.5bn (1.5 months of import cover), the government, according to the finance minister, was working on securing concessional funding of $6.3bn from multilateral lenders (World Bank, Asian Development Bank, Islamic Development Bank) and bilateral assistance of around $10bn. The funding of $3bn from the IMF has already been approved.

The balance of payment data for September 2023 revealed that exports of goods and services increased marginally by 0.6pc on a MoM basis, while their imports decreased by 5.9pc.

Moreover, the recent administrative and regulatory actions to curb illegal activities in the forex market had narrowed the gap between interbank and open market exchange rates and worker’s remittances increased by 5.3pc MoM.

Published in Dawn, November 1st, 2023