Public Financial Management Support Programme II (PFM-II)

Overview

Pakistan is facing possibly the worst economic and fiscal crisis in its history. A combination of low revenue, persistent fiscal and trade deficits, rising debt levels, political instability and natural disasters have played havoc with the nation's finances.  

At 8 per cent of GDP, Pakistan’s debt interest payments as a share of the economy are now among the highest in the world. Yet Pakistan’s total tax take is only 10 per cent of GDP, which is one of the lowest revenue to GDP ratios in the world. As a result of low revenues and a heavy interest burden the government has next to no resources left for social spending. 

The government is now taking key steps to address macroeconomic imbalances and fiscal sustainability. In this context, it is all the more critical that the Ministry of Finance is able to analyse macroeconomic developments, assess the impact of different fiscal scenarios and identify credible options to address its large social and development spending needs.

Challenges

Until recently, the Ministry of Finance lacked the tools to be able to forecast accurately the future growth of the Pakistan economy and the likely inflows of revenue to support government spending.  

The forecasts of key economic aggregates such as GDP, national investment and savings were frequently based on informal estimates on the likely short and medium term path of the economy. These estimates which were based on inadequate data and modelling capabilities, frequently turned out to be over-optimistic, leading to shortfalls in the revenue, fiscal imbalances and the unsustainable accumulation of debt.

Expertise

Under two successive technical assistance projects financed by the European Union (2014-2024) our public finance team has supported the Economic Adviser’s Wing in the Ministry of Finance to build a technically sound macroeconomic and macro-fiscal forecasting model, alongside development of staff capacity to apply, maintain and further develop the Ministry’s forecasting capability. 

This collaboration has enabled the development of the macroeconomic modelling and forecasting capability of the Ministry of Finance. Our support included the provision of expertise in econometrics; provision of IT hardware and modelling software; a continuous schedule of staff training, and the establishment of an online database for maintenance and improved accessibility of the macroeconomic and fiscal data on Pakistan (the Pakistan Economy Dashboard). 

This work was conducted in stages starting with a major effort to establish a clean and consistent economic database. There followed by an extensive stage of testing of hypotheses on the functioning of different parts of the national economy, which led to the achievement of a strong annual forecasting capability by 2020. In light of the various global economic shocks and natural disasters experienced since then, the model was enhanced to permit much shorter term forecasting (‘now-casting’), a key requirement of the government for macroeconomic and fiscal management and negotiations with the IMF.

Impact

Since 2022, a macroeconomic model capable of ‘now-casting’ has been fully operational in the Ministry of Finance. This forms the basis for the Monthly Economic Outlook report published by the Ministry.

The model provides the technical basis for reviews of the implications of alternative fiscal and monetary policies. In addition, it has provided a technical laboratory for the staff of the Wing to develop their skills in applied economic and econometric analysis. The model is also feeding directly into the government’s high-level decision-making procedures for fiscal policy.