Ministry Points out Key Risks to Pakistan Economy

The Ministry of Finance has identified eight critical fiscal risks that could potentially escalate vulnerabilities within Pakistan's economy. These risks encompass macroeconomic imbalances, escalating debt levels, guarantees, climate degradation, losses within State Owned Enterprises (SOEs), risks associated with public private partnerships, fiscal indiscipline among provincial governments, and governance challenges.

According to the Fiscal Risk Statement (FRS) for 2023-24 released by the Ministry of Finance, Pakistan has experienced significant volatility in its inflation rate in recent years. This volatility has been attributed to several factors, including currency devaluation and fluctuations in energy and food prices within the global market. The acknowledgment of these influences underscores the complex nature of inflation dynamics within Pakistan's economy. It emphasizes the need for strategic measures to mitigate the impact of external factors and to stabilize inflation rates, ensuring greater economic predictability and resilience. The Pakistani rupee has experienced significant depreciation in recent years, influenced by various risk factors such as trade imbalances, external debt, political instability and global economic conditions. The State Bank of Pakistan (SBP) is actively responding to increasing inflation by raising the policy rate. Moreover, the government is also focusing on taking effective policy, administrative, and relief measures to control inflation and stabilise the economy, the FRS said. The inflation outlook has deteriorated, and there is a heightened risk to external stability. The uncertainty surrounding the future adjustment path in energy prices is the main upside risk to the inflation outlook. However, a potential moderation in international commodity prices may contribute to a reduction in inflation. Further, exchange rate adjustments, passing on the impact of energy price increases, and interest rates on the higher side would enable the prices to decline over the medium term. Subsequently, it would follow the expansionary monetary policy and improvement in fiscal space given the decline in mark-up payments. As such, the stabilization measures taken during the last year can bring macroeconomic and fiscal benefits in the medium term.

Pakistan is among the top 10 countries most vulnerable to the impacts of climate change, as highlighted by the Global Climate Risk Index 2021, published by the German watch. With the number of days per year with a heat index greater than 35°C projected to rise significantly, Pakistan will be exposed to a more severe, frequent, and longer droughts, while the melting of the Himalayan glaciers will pose a major threat. The Ministry of Climate Change has already identified 33 glacial lakes prone to hazardous glacial lake outburst flooding (GLOF), which could put millions of people at risk. Moreover, Pakistan ranks 12th in the world in terms of climate vulnerability, as per the Climate Vulnerability Monitor, highlighting the need for an urgent action, the FRS said.