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Pakistan’s budget to support negotiations with IMF for new programme: Moody’s

  • Says government spends more than half its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks
Published June 14, 2024

Moody’s Ratings, a global credit rating agency, on Friday said Pakistan government’s newly-announced budget for fiscal year 2024-25 would “likely support” Islamabad’s ongoing talks with the International Monetary Fund (IMF) for a new Extended Fund Facility (EFF).

However, it warned that a resurgence of social tensions in the wake of high inflation could weigh on the government’s reform implementation.

On Wednesday, Finance Minister Muhammad Aurangzeb announced Pakistan’s federal budget 2024-25, targeting a modest 3.6% growth for the coming fiscal year, as Islamabad looked to appease the Washington-based lender and balance its burgeoning books with higher taxation.

Pakistan is currently engaged in talks with the IMF for a longer, larger programme as it seeks permanent macroeconomic stability.

Moody’s warned that a resurgence of social tensions on the back of the high cost of living (which may increase because of higher taxes and future adjustments to energy tariffs) could weigh on reform implementation

Aurangzeb, during his budget speech and the post-budget press briefing, said early July is by when the staff-level agreement could be finalised.

Moody’s said the budget for FY25 outlines a quickening of fiscal consolidation to be achieved through increases in taxes and stronger projected nominal growth.

“The announced budget will likely support Pakistan’s ongoing negotiations with the IMF for a new EFF that will be crucial for the government to unlock financing from IMF and other bilateral and multilateral partners to meet its external financing needs,” said the global rating agency.

“However, it will be the government’s ability to sustain reform implementation that will be key to allowing Pakistan to meet its budget targets and continually unlock external financing to meet its needs, leading to a durable easing of liquidity risks.”

Moody’s warned that a resurgence of social tensions on the back of the 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,” it said.

The government on Wednesday announced a consolidated (federal and provincial) budget deficit of 5.9% of GDP for fiscal 2025, narrowing from an estimated 7.4% for fiscal 2024. The primary balance is set at a surplus of 2.0% 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%.

Moody’s said that the budget showed the government seeks to achieve quicker fiscal consolidation mainly through revenue increases, with little spending-containment measures.

“The government has set a challenging target to substantially increase federal government revenue to Rs17.8 trillion, about 46% higher from a year ago,” it noted.

Moody’s noted the increase in revenue is led by a 40% increase in tax revenue that the government seeks to achieve through a combination of new taxes (for example, higher taxes on cars, cement, steel, gas and diesel) and stronger nominal growth.

“Overall, the government targets an increase in revenue/GDP to 14.3% in fiscal 2025 from 11.5% in fiscal 2024.”

At the same time, the budget is targeting an overall federal government expenditure of PKR18.9 trillion, about 25% higher than a year ago, it said.

“The increase in expenditure reflects lack of significant cost-containment measures and Pakistan’s very high interest payments,” said Moody’s.

The agency stated that the budget allocated subsidies increased by 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 also announced an increase in public sector pensions and salary budgets.

Pakistan hopes for Moody’s rating upgrade as economic indicators improve

“Meanwhile, the government spends more than half its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks,” highlighted Moody’s.

The budget estimated debt servicing payments to have increased by about 18% for fiscal 2025 compared with a year ago. About 55% of fiscal 2025 revenue (PKR9.8 trillion) is earmarked for interest payments on the government’s debt.

“Pakistan’s very weak debt affordability drives high debt sustainability risks,” Moody’s noted.

“Having a significant share of its 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.


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KU Jun 14, 2024 01:08pm
Reminder to IMF. People continue to suffer high cost of living while no cut in govt expenses or power theft/public heists, high cost of energy, unfeasible businesses, protection to untaxed, etc.
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M. Zahid Iftikhar Jun 14, 2024 03:13pm
PTI & PPP blocked privatization of SOEs during 2013-2018. Neither did anything whatsoever to control deficits. Now PTI partisans are talking aimlessly about taxation, deficits, & expenditure.
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Citizen Jun 14, 2024 03:45pm
Strangely no tax on Agriculture yet after 76 years of independence. Unless this colonial baggage is thrown away budget would not balanced and we keep the begging bowl in our hands.
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mustafa Jun 14, 2024 04:51pm
we should keep walking this path. it's difficult but it will help us more than any other thing right now.
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Yousuf Jun 15, 2024 04:03am
How anyone can believe that real GDP will go beyond 2% when over half of the Tax revenue will spend on interest expenses. Heading towards bigger problems.
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Rebirth Jun 15, 2024 11:05am
26.3 trillion ر ($95 billion) expense - 17.8 trillion ر ($64 billion) revenue = 8.5 trillion ر ($31 billion) deficit. We need to collect 9 trillion ر by FY26 from agriculture, real estate and shops.
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Rebirth Jun 15, 2024 11:06am
9 trillion ر out of the 26.3 trillion ر of our expenses goes towards servicing domestic debt. That’s equal to our entire deficit. We have increased this amount ourselves through high interest rates.
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Hello Jun 18, 2024 10:39am
The elephant in the room nobody is bringing up is the huge and unsustainable armed forces/army expenditure, if pak army size is cut down to half or less, it will improve the financial position also.
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lolol Jun 20, 2024 05:02am
@M. Zahid Iftikhar, PMLN had a simple majority during 2013-2018 so it had the power to privatize SOEs on its own if it wanted to. Dont talk from your posterior, please
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