ISLAMABAD: Pakistan continues to face five major and persistent economic challenges, resulting in rising poverty and social vulnerabilities, said the Ministry of Finance a day after the national assembly and the federal cabinet were dissolved.

In its first quarterly performance report to the Asian Development Bank (ADB) on $1.5bn Building Resilience with Active Country-cyclical Expenditures (BRACE) released on Thursday, the Ministry of Finance said the financial progress remained satisfactory on Countrycyclical Development Expenditure Programme (CDEP) in the quarter ending Dec 31, 2022 as 41.5pc of the budget for the fiscal, under social protection, was utilised.

It said the current expenditures increased by 30pc to Rs6.061 trillion in July-December FY23 against Rs4.676tr in the comparable period of the last year. The bulk of this rise stemmed from a sharp rise in mark-up payments which grew by 77pc driven by higher servicing on domestic and foreign debt due to a higher level of interest rates. Public Sector Development Programme (federal and provincial) grew by just 4.5pc during the first half of the current fiscal year.

Total expenditures grew by 19.8pc to Rs6.382tr in July-December FY23 against Rs5.328tr in the same period of the previous year. Total revenue, during the first half of FY23, grew by 18.8pc to reach Rs4.699tr against Rs3.956tr in the same period of last year. The major contribution to this growth came from a 26.4pc increase in non-tax collection, while tax collection grew 17pc.

Lists factors that have been persistently hitting household consumption

To support the business and agriculture sectors, the government was taking measures to generate employment, protect job losses, and ensure food security. The overall financial progress achieved under the CDEP showed that 38.3pc of the budget had been utilised till Dec 31, 2022.

The report said a set of persistent challenges continue to haunt the national economy. On top of the list are the high fuel prices also aggravated by steep exchange rate depreciation. Overall, the impact of the Russian-Ukraine war on the economy of Pakistan remains significant, mainly due to high fuel prices.

Fuel prices have relatively high multiplier effects and can cause a reduction in economic activity across different sectors. “High fuel prices not only reduce the direct consumption of petroleum products but also shrink other sectors such as electricity production, industrial demand, goods transportation, travelling, mining, construction, and many others”.

After fuel prices, edible oil has the most impact on GDP and household consumption, but it is almost double for the poor. Due to the relatively higher elasticity of oil with its price, demand shock is greater than wheat and almost double in poor households. As Pakistan remains largely dependent on imported palm oil (all from Malaysia and Indonesia), it remains highly prone to any upward shock in prices and can also cause deterioration in the healthy diet structure of children.

Third is the persistent challenge of rising poverty. The report said the Russian-Ukraine war crisis has a serious impact on poverty that can increase the burden on the already tightened fiscal space. The post-Disaster Needs Assessment Report of the 2022 floods has already warned that the national poverty rate may increase by 3.7-4pc by pushing 8.4-9.1 million more people into poverty due to devastating calamity. Any potential cash handouts or expansion of the Benazir Income Support Programme can further increase the existing high fiscal deficits.

Another key challenge remains record inflation. It said the rising inflation, particularly food inflation –– the highest in the history of Pakistan ––, increase in administered prices of petroleum products, electricity, and gas and continuous depreciation of the country’s currency have a negative impact on household consumption which will lead to greater poverty, particularly in rural areas, the ministry highlighted.

Moreover, the country continues to reel under the effects of the 2022 floods. While the global crisis, because of the Russian-Ukraine War, was expected to result in slowing down the economic growth in Pakistan, its adverse impact on poverty, food insecurity and deteriorated diet quality are likely to be more pronounced, the report pointed out. However, the cataclysmic floods in 2022 in Pakistan affecting 33 million people and 1.8 million hectares of cropland across the country; damaging cotton and rice crops, perishing to 1.16 million floods and major damages to public infrastructure and private properties will lead to lower economic growth, higher poverty and food insecurity, and worsened diet quality, especially in rural areas.

Published in Dawn, August 11th, 2023