Moody’s terms mini-budget positive for export sectors

But sees greater risk of fiscal slippage in absence of additional revenue-raising measures

KARACHI: Moody’s - one of three big global credit rating agencies - has termed the Pakistan Tehreek-e-Insaf (PTI) government’s second mini-budget positive for manufacturing and export-oriented sectors, which will lend much-needed support to enhancing the country’s foreign income and curb the current account deficit (CAD).

The US-based rating agency, however, stated that new budgetary measures weakened the government’s income generation side as tax incentives awarded to industries and the agriculture sector further toughened the challenge of achieving the tax revenue collection target of Rs4.398 trillion. Accordingly, the budget deficit is expected to remain high.

“While the mini-budget will bolster the export sector, there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of additional revenue-raising measures,” the rating agency said on Thursday in a commentary on the second mini-budget which Finance Minister Asad Umar presented last week.

Last year in June, the agency downgraded Pakistan’s credit rating to ‘B3 negative’ from ‘stable’ after it found that the country’s foreign currency reserves were insufficient to pay back foreign debt.

The latest commentary suggested that foreign currency reserves were inclined to improve, which might lead the credit rating body to consider revising upwards the country’s credit rating going forward.  The agency, however, failed to provide any statement on the future credit rating of the country.

“Specific measures taken in the latest mini-budget include reduction in import customs duties on essential raw material and machinery, abolition of tax on retained earnings and incentives for the agriculture sector, which accounts for around 20% of the country’s exports,” it said.

If effective, the new budgetary measures will aid Pakistan’s manufacturing sector, fostering export and import substitution, and help narrow the current account deficit. However, in the absence of new spending cuts or revenue-raising measures, these steps will keep Pakistan’s budget deficit wider for longer, potentially eroding the credibility of government efforts to achieve fiscal consolidation.

Pakistan’s revenue base was a slim 15.4% of GDP in fiscal year 2018, which ended on June 30, 2018.

The government presented limited revenue-raising measures, primarily taxes on large vehicles and high-end mobile phones. “As a result, the mini-budget places greater weight on improvement in tax administration and spending restraint for the government to meet its deficit target of 5.1% of GDP,” it said.

“We expect the deficit to widen to 6% of GDP in fiscal year 2019 because revenue growth is likely to be below government projections provided slower economic growth and new revenue-based incentives, before gradually narrowing to 5% of GDP by fiscal 2021 as the economy picks up.”

The mini-budget comes in the backdrop of low export growth in the first six months (July-December) of fiscal year 2019, despite the Pakistani rupee’s 25% decline against the US dollar since December 2017. The government was seeking to narrow the current account deficit by reducing some of the tax distortions which exporters face.

“Weak exports aside, Pakistan’s current account dynamics have been largely positive in recent months,” it pointed out. “Remittances rose by 10% year-on-year in US dollar terms in the first half of fiscal year 2019, while goods’ import slowed sharply by around 3% year-on-year as non-fuel goods import contracted.”

“Although we expect the current-account deficit to narrow to 4.7% of GDP in fiscal year 2019 and to 4.2% in fiscal year 2020 from 6.1% in fiscal year 2018, it will remain sizable and wider than in 2013-16 driving Pakistan’s external financing needs.”

Foreign financing

“The government has secured $12 billion in financing from Saudi Arabia and the United Arab Emirates - in each case amounting to $6 billion and divided equally between deposits and deferred oil payments - which is likely to largely cover the country’s net financing needs for fiscal 2019,” Moody’s Investors Service said.

However, a net financing gap beyond fiscal 2019 remains because of the still sizable current account deficit, it said.

Pakistan remains in negotiations with the International Monetary Fund (IMF) over a new programme, which will provide a stable additional source of external financing as well as technical support and assistance on macroeconomic rebalancing and structural reform policies.

Published in The Express Tribune, February 1^st, 2019.

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