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ISLAMABAD: The government spends more than half of its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks, says Moody’s Investors Services (Moody’s).

The rating agency further stated that the budget reflects quicker fiscal consolidation, but the 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.

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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 added.

On 12 June, the government of Pakistan (Caa3 stable) presented its fiscal 2025 (ending June 2025) budget to the Parliament. The budget outlines a quickening of fiscal consolidation to be achieved through increases in taxes and stronger projected nominal growth.

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. The government announced a consolidated (federal and provinces) budget deficit of 5.9 per cent of GDP for fiscal 2025, narrowing from an estimated 7.4per cent for fiscal 2024.

The primary balance is set at a surplus of 2.0per cent of GDP for fiscal 2025, from around 0.4per cent for fiscal 2024. The government projects real GDP growth at 3.6per cent for fiscal 2025 and headline inflation at 12per cent. The budget showed the government seeks 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 federal government revenue to Rs17.8 trillion, about 46per cent higher from a year ago. The increase in revenue is led by a 40per cent 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 14.3per cent in fiscal 2025 from 11.5per cent in fiscal 2024. At the same time, the budget is targeting an overall federal government expenditure of PKR18.9 trillion, about 25per cent higher than a year ago.

The increase in expenditure reflects lack of significant cost-containment measures and Pakistan’s very high interest payments. The budget allocated subsidies increased by 27per cent 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 its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks. The budget estimated debt servicing payments to have increased by about 18per cent for fiscal 2025 compared with a year ago.

About 55per cent of fiscal 2025 revenue (Rs9.8 trillion) is earmarked for interest payments on the government’s debt. Pakistan’s very weak debt affordability drives high debt sustainability risks. 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.

Copyright Business Recorder, 2024

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