Moody’s Ratings said on Friday that Pakistan’s federal government had increased rates of taxes in the budget for 2024-25 to generate higher revenue, moving forward in a direction to win the International Monetary Fund (IMF) loan programme and unlock additional financing from the multilateral and bilateral partners.
At the same time, however, it noted a substantial increase in subsidies, particularly for the power sector, which showed the government’s inability to undertake the promised structural reforms amid a weaker coalition government.
In addition, a jump of 18% in interest payments on debt to Rs9.8 trillion is equivalent to half of the estimated revenue, indicating a “weak debt affordability which drives high debt sustainability risks,” the global ratings agency said in a commentary titled “Budget reflects quicker fiscal consolidation, but ability to sustain reforms will be key to easing liquidity risks”.
“The announced budget will likely support Pakistan’s ongoing negotiations with the IMF for a new Extended Fund Facility (EFF) programme that will be crucial for the government to unlock financing from IMF and other bilateral and multilateral partners to meet its external financing needs.”
It pointed out that the budget-allocated subsidies increased 27% to Rs1.4 trillion, mainly driven by large increases in subsidies to the power sector, reflecting limited progress in energy sector reforms. “The government has also increased public sector pensions and salary budgets.”
The government spends more than half of its revenue on interest payments, which indicates very weak debt affordability. Budget estimates showed an increase of about 18% in debt servicing payments for fiscal 2025 compared with a year ago.
About 55% of the fiscal 2025 revenue (Rs9.8 trillion) is earmarked for interest payments on the government’s debt. Having a significant share of the budget allocated towards debt payments will constrain the government’s capacity to service its debt while meeting essential social spending and infrastructure needs.
It said that the government’s ability to sustain reform implementation would be the key to allowing Pakistan to meet its budget targets and continually unlock external financing, leading to a durable easing of liquidity risks.
“A resurgence of social tensions on the back of high cost of living (which may increase because of higher taxes and future adjustments to energy tariffs) could weigh on reform implementation. Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain.”
The government announced a consolidated (federal and provinces) budget deficit of 5.9% of GDP for fiscal 2025, narrowing from an estimated 7.4% of GDP for fiscal 2024.
The primary balance is set at a surplus of 2% of GDP for fiscal 2025, from around 0.4% for fiscal 2024. The government projects real GDP growth at 3.6% for fiscal 2025 and headline inflation at 12%.
The budget showed that the government sought to achieve quicker fiscal consolidation mainly through increases in revenue, with little spending-containment measures.
The government has set a challenging target to substantially increase the federal government revenue to Rs17.8 trillion, about 46% higher from a year ago.
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