‘Ambitious’ budget may miss targets: Fitch Ratings

Says financial health will improve in FY25, albeit ‘at a cost to growth’

Salman Siddiqui June 20, 2024


Fitch Ratings has termed Pakistan’s FY25 budget draft an ‘ambitious’ plan, projecting that the politically weak government will miss several set targets, including economic growth, tax collections, non-tax revenue, fiscal deficit, primary deficit, and expenditure in the year starting July 1, 2024.

Despite the challenging environment, however, the financial health of the nation will improve in FY25, albeit ‘at a cost to growth’. The ratings agency predicts Pakistan will fall short of the target, and arranging the required external financing, estimated at $20 billion including rollovers, will remain a ‘key challenge’ in FY25.

In its post-budget-draft commentary titled ‘Pakistan budget targets deficit reduction, supporting International Monetary Fund (IMF) prospects’, Fitch Ratings says, “Pakistan’s ambitious FY25 budget strengthens prospects for an IMF deal. It is uncertain whether fiscal targets will be hit, but even assuming only partial implementation of the budget, we forecast the fiscal deficit will narrow. This should reduce external pressures, albeit at a cost to growth.”

The agency anticipates that tight policy settings might depress growth more than the government’s expectations and reduces “our growth forecast to 3% for FY25… (compared to the government target of 3.6%), despite some improvements in short-term indicators of economic activity.”

The agency says the FY25 budget draft, released on June 13, projects a headline deficit of 5.9% of GDP and a 2% primary surplus (FY24 estimate: 7.4% and 0.4%, respectively), on wide-ranging tax increases and also significant fiscal efforts at the provincial level. The budget includes significantly more developmental spending and foresees growth accelerating to 3.6% in FY25 (FY24: 2.4%). “These plans could face stiff resistance inside parliament – from both coalition partners and opposition parties – and among broader society, after the close outcome of the February elections delivered a weaker-than-expected mandate for Mr Sharif’s PML-N (Pakistan Muslim League-Nawaz) party.”

“Our updated fiscal forecasts assume partial implementation and project a primary surplus of 0.8% (compared to the target of 2%), on shortfalls in revenue generation and an overshoot in current spending, partly offset by under-execution in development spending.”

Pakistan’s projected funding needs still exceed reserves, at about $20 billion per year in FY24–FY25, including maturing bilateral debts that are expected to continue to be rolled over. “This leaves Pakistan exposed to external funding conditions and policy missteps.”

Pakistan’s ‘CCC’ rating, affirmed in December 2023, reflects high external funding risks amid high medium-term financing requirements, it says.

Pakistan’s external position has continued to improve since February’s election. The current account deficit is on track to narrow to 0.3% of GDP (just $1 billion) in FY24, from 1.0% in FY23. Subdued domestic demand HAS compressed imports, while exchange rate reforms have attracted remittance inflows back to the official banking system.

Strong agricultural exports also help. Gross reserves (including gold) now stand at $15.1 billion, over two months of external payments, up from $9.6 billion at FYE23.

Government debt looks set to decline to 68% of GDP by FYE24 due to high inflation and deflator effects, offsetting soaring domestic interest costs. “We expect inflation and interest costs to decline in tandem, with economic growth and primary surpluses driving government debt/GDP gradually lower.”

The State Bank of Pakistan (SBP) cut its policy rates for the first time in five years on June 10, by 150bp to 20.5% to which the agency said, “… And we now forecast FY25 inflation at 12%, and the FYE25 policy rate at 16%.”

External liquidity and funding are still Pakistan’s key credit challenges, despite stable debt dynamics. “We believe a new IMF deal will be agreed, underpinning other external funding. However, sustaining the tight policy settings necessary to keep external financing needs in check, and to maintain compliance with a new EFF, could become increasingly challenging.”

Nevertheless, the FY24 primary deficit is in line with the target, and the authorities have undertaken unpopular subsidy reforms over the past year, supporting fiscal credibility. While Pakistan has a poor record of sustaining reforms over time, the absence of viable alternatives has strengthened support for tough policy decisions, at least in the near term.

Pakistan completed its nine-month IMF Stand-By Arrangement in April, and in May, the IMF reported “significant progress” toward agreeing to a new Extended Fund Facility (EFF).



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