Fiscal Risks

The Fiscal Risks is part of the federal budget for FY 2020-21. This page reproduces the text of its 2 PDF pages, extracted automatically from the official PDF published by the Finance Division, Government of Pakistan.

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                    Fiscal Risk Statement

             This statement is prepared to comply with Section 4, Sub-Section 3 (b) of
Public Finance Management Act, 2019, which states that Annual Budget Statement shall
also contain statement of fiscal risks.

              Fiscal  risks are  risks  that may lead  to deviations  in  fiscal forecasts
presented  in Medium-Term Budgetary Statement  laid under  section 5  of  Fiscal
Responsibility and Debt Limitations Act 2005. Principle of ‘reasonableness’ is followed
which means that only those fiscal risks are presented that have a reasonable chance of
materialising in the Budget Year 2020-21 and the medium-term.

          Economic risks: Corona has had profound impact on Pakistan’s economy.
For the first time in many decades, Pakistan’s economy has entered into recession as
GDP contracted by 0.4% in 2019-20. As per the current estimates, economic growth is
projected at 2.1 percent in 2020-21. However, there are downward risks to target growth
emanating from two uncertainties: 1) worsening global economic situation, and 2)
prolonged recovery in domestic markets.  If these risks materialise, then tax revenue
collection target is likely to be impacted. However, these risks are categorised as short-
term risks predominantly affecting 2020-21 forecasts. The medium-term outlook remains
positive and economic growth is projected to see sustained recovery.

          Losses in energy sector: While the government has taken a number of
steps to reduce energy sector losses, including increase in prices of energy for high-end
consumers, improved management, and resolution of circular debt, there are high off-
budget arrears and liabilities. There are two main risks emanating from; 1) non-reduction
of flow of energy sector losses, and 2) non-payment of arrears and liabilities. Both of
these risks may impact government’s fiscal position  if such arrears and liabilities are
required to be paid through the budget.

          Losses in Public Sector Enterprises (PSEs): The government provides
guarantees, grants, loans and at times equity investments to Public Sector Enterprises.
Guarantees are categorized as contingent liabilities, however, the grants, loans and
equity investments  directly impact the budget as they increase the Government’s
expenditure. While the government intends to structurally reform PSEs there is a risk that
such reforms take more time than envisaged which will negatively impact government
finances. To mitigate these risks, the Government is committed to develop a new State-
Owned Enterprise Law in the latter half of 2020 that will provide a stronger governance
and performance management framework.

          The government also intends to adopt a clear policy for establishing PSEs
in future, deciding whether to sell, liquidate or retain the existing PSEs. The policy will
decide as to which of the PSEs shall be retained or established in future or shall be run
on a self-sustainable basis. Similarly the policy will also lay down principles regarding
giving subsidies to the SOEs on an ongoing basis.

            Natural  disasters:   Historically,  natural  disasters  included  floods,
earthquakes, droughts etc. Since 2005, damages and losses resulting from natural
disasters in Pakistan have exceeded USD 18 billion 1. Government has established
disaster management functions in shape of disaster management authorities, created a
fund (called National Disaster and Risk Management Fund) and formulated various
policies, strategies and plans (e.g. National Disaster Management Plan 2013-2022). In
addition, the government has also allocated on-budget natural disaster and contingency
reserve to deal with natural disasters in 2020-21 budget. However, there is a risk that
natural disaster will have negative impact on the medium-term fiscal position.

          Budget surpluses  of provinces: The need  to  project/expect  large
provincial budget surpluses in future points to a broader problem with the fiscal landscape
of the country. With the provinces taking a substantial share of national revenues, and
federal government being liable for almost the entire national debt, the structural fiscal
balance has become lopsided. The situation is unsustainable unless an appropriate
adjustment occurs in the structural fiscal balances of federal and provincial governments.
The government has formed 10th National Finance Commission with the view to
deliberate on options leading to fiscal harmonisation.

           Conclusion: In order to mitigate these risks, continued monitoring and
implementation of structural reforms agenda shall be pursued. Reduction of fiscal deficit
to make Pakistan’s debts more sustainable and identification of fiscal space for priority
human and infrastructure development will remain the key principles based on which
medium-term fiscal policy shall be based.

1 World Bank Estimates: Report No. 94474-PK “Fiscal Disaster Risk Assessment Options for Consideration, PAKISTAN”