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Climate change

Government Identifies Key Risks to Fiscal Year Budget and Outlook

Strategic Insights

— 2 min read

The government has highlighted several major risks to the upcoming fiscal year's budget and medium-term outlook, including slower-than-expected GDP growth, inflationary pressures, and exchange rate volatility. Finance Minister Muhammad Aurangzeb and Finance Secretary Imdadullah Bosal presented a written statement to parliament, categorizing these risks into seven main categories: macroeconomic, revenue, debt, state-owned enterprises (SOEs), climate change, natural disasters, and other contingent liabilities. The risks pose significant challenges to the government's ability to meet its revenue targets and maintain a stable fiscal deficit.

Key Takeaways:

  • Macroeconomic risks, including slower economic growth and inflation shocks, are primary concerns for the government, with a 1% slowdown in GDP growth potentially reducing government revenue and increasing expenditures on social safety programs.
  • The Federal Board of Revenue (FBR) has set a revenue target of Rs14.13 trillion for the next fiscal year, which is a significant challenge given the Rs1.16 trillion shortfall in the current year.
  • Revenue risks, including slower-than-expected tax growth and weaker economic performance, could increase the fiscal deficit by 0.4% of GDP.
  • State-owned enterprises (SOEs) were identified as another source of fiscal risk, with potential shortfalls in SOE dividend payments or increased government support potentially adding 0.4% of GDP to the deficit.
  • Climate-related risks and natural disasters are major concerns, with the fiscal impact of a major disaster potentially increasing the deficit by 1.03% of GDP without proper risk financing mechanisms.
  • The government relies heavily on volatile revenue streams and recognizes the need to improve tax administration and compliance.

Statistics:

  • A 1% slowdown in GDP growth could reduce government revenue and increase expenditures on social safety programs.
  • The combined effect of macroeconomic and revenue risks could widen the fiscal deficit by approximately 0.13% of GDP.
  • A two-percentage point increase in domestic interest rates and a one percentage point rise in external rates could add 0.42% to the fiscal deficit due to higher interest payments.
  • Potential shortfalls in SOE dividend payments or increased government support could add an estimated 0.4% of GDP to the deficit.
  • Climate-related risks and natural disasters could increase the fiscal deficit by 1.03% of GDP without proper risk financing mechanisms.
  • A major disaster could be mitigated through effective risk financing tools, reducing the deficit to 0.44% of GDP.

Sources:

  • Written statement by Finance Minister Muhammad Aurangzeb and Finance Secretary Imdadullah Bosal to parliament.
  • Statement notes the impact of 1% slowdown in GDP growth on government revenue and expenditures.
  • Federal Board of Revenue (FBR) sets revenue target of Rs14.13 trillion for the next fiscal year.
  • State Bank of Pakistan (SBP) profits decline by 30% and petroleum levy collections fall short by 20%.
  • Government warns of debt servicing risks due to increased interest rates.
  • State-owned enterprises (SOEs) identified as source of fiscal risk.
  • Climate-related risks and natural disasters noted as major concerns.
  • Statement highlights the government's reliance on volatile revenue streams and the need to improve tax administration and compliance.

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