Moody's, a global credit rating agency, on Tuesday inquired about the implications of missing a key target of increasing the tax-to-GDP ratio to 10.6% in the last fiscal year, as Pakistan made an emphatic pitch for an upward revision in the current junk rating.
The credit rating agency also asked about progress in trade talks with the United States and whether the central bank was still exercising any control over imports and the exchange rate market, according to officials privy to the meeting details.
Moody's raised these questions during a session with Pakistan's Finance Minister Muhammad Aurangzeb. Minister of State for Finance Bilal Kayani and Governor State Bank of Pakistan Jameel Ahmad also attended the session, which would determine whether the rating agency would upgrade Pakistan in its next announcement.
Pakistan's current Moody's rating is Caa2 with a positive outlook. This rating was upgraded from Caa3 with a stable outlook in August 2024. But it is still below the investment grade and hampers Pakistan's smooth entry in the international capital markets to raise debt.
According to the officials, Moody's asked about the impact of missing the tax-to-GDP ratio in the last fiscal year on this fiscal year's targets. Aurangzeb said that the Federal Board of Revenue (FBR) would give a separate briefing to the rating agency for addressing any of its concerns, according to the officials.
The FBR's tax-to-GDP ratio remained at a little over 10.2% as against the target of 10.6% after the FBR could pool only Rs11.745 trillion in taxes in the fiscal year 2024-25. The government missed the annual tax collection target by a margin of Rs1.225 trillion.
After the meeting that Moody's team was provided with a comprehensive overview of Pakistan's reform journey, with a particular emphasis on improving the tax-to-GDP ratio through technology-driven tax administration reforms, digitisation of systems, and robust enforcement measures.
The minister emphasised that under the direct oversight of the prime minister — who chairs regular meetings on tax reform — the government was implementing measures to expand the tax base, plug leakages, and enhance compliance. Aurangzeb noted that the Rs2 trillion revenue delta achieved this year had come through autonomous efforts, and the government was firmly committed to reaching a tax-to-GDP target of 13 to 13.5% in the next few years, according to the ministry.
Moody's also asked about the details of the Pakistan-US trade talks but the government did not share any details except that the deal was expected soon. The sources said that the United States has asked for preferential trade treatment to which Pakistan has proposed to sign a pact.
"Ongoing discussions with the United States on preferential tariff access were noted as making encouraging headway," the Ministry of Finance stated after the meeting.
There were also questions about the average interest rate that the government used for allocating the Rs8.3 trillion for debt servicing for this fiscal year. Moody's was informed that a 12% average interest rate had been used for this fiscal year.
Moody's asked about the movement in the exchange rate and any restrictions on imports. The central bank clarified that the exchange rate was market determined and there were no restrictions on imports.
The rupee has again started coming under pressure and the grey market is resurfacing with a rate that is about Rs7 per dollar higher than the inter-bank rate, according to the exchange market dealers.
According to the finance ministry, the Finance Division provided an in-depth briefing on Pakistan's macroeconomic outlook, reform agenda, and financial stability.
"Looking ahead, the finance minister expressed optimism that the improving macroeconomic indicators and reform momentum would be positively acknowledged by rating agencies, further strengthening Pakistan's case to tap international markets and deepen its external sector stability," said the ministry.
Aurangzeb and his team presented compelling evidence of macroeconomic recovery, including a sharp reduction in inflation, a cut in the policy rate, stabilisation of the exchange rate, a current account surplus, and a surge in foreign exchange reserves — crossing $14 billion by the end of June, stated the ministry.
It added that the improvements in remittance inflows and export performance were also cited as signs of resilience and renewed investor confidence.
During the session, the finance minister apprised the Moody's team of the significant strides Pakistan has made in stabilising its economy and laying the foundations for sustainable and inclusive growth, it added.
He underlined the successful completion of the final International Monetary Fund (IMF) review under the Stand-By Arrangement, including the disbursement of the second tranche and progress under the Resilience and Sustainability Facility (RSF), as key milestones that have restored confidence in Pakistan's economic management.
The minister highlighted a series of structural reforms undertaken by the government to anchor long-term stability. These included prudent fiscal measures in the recently announced budget, tariff and trade liberalisation geared towards export-led growth, and concerted efforts to rationalise expenditure.
The meeting further outlined Pakistan's re-engagement with global financial markets, including the successful arrangement of $1 billion in commercial financing from the Middle Eastern region, plans for an inaugural Panda bond, and Pakistan's intent to explore the Eurobond and other international debt markets as credit ratings improve.
The finance minister also addressed queries from the Moody's team and reiterated Pakistan's commitment to staying the course on macroeconomic reforms, including in areas of privatisation, restructuring of state-owned enterprises (SOEs), and right-sizing of government.
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