Moody’s has indicated that Pakistan’s freshly unveiled budget for the fiscal year 2024-25 may aid the ongoing negotiations with the International Monetary Fund for a new Extended Fund Facility.
However, the agency has expressed apprehensions regarding potential social unrest stemming from high inflation, which could hinder the government’s reform implementation efforts.
The budget, targeting a modest 3.6% growth, emphasizes fiscal consolidation through tax hikes and anticipated nominal growth. This strategy is viewed favorably as it could facilitate IMF funding and address Pakistan’s external financing requirements.
Moody’s stressed the criticality of the government’s sustained reform efforts to achieve budgetary goals and unlock external financing, thus alleviating liquidity risks. However, it cautioned against rising social tensions driven by escalating living costs, possibly exacerbated by increased taxes and future adjustments in energy tariffs, which could impede reform initiatives.
Furthermore, Moody’s flagged the risk posed by the coalition government’s constrained electoral mandate on its capacity to enact challenging reforms.
The budget forecasts a consolidated (federal and provincial) deficit of 5.9% of GDP for fiscal 2025, a reduction from an estimated 7.4% in fiscal 2024. A primary surplus of 2.0% of GDP is envisaged for fiscal 2025.
Real GDP growth is anticipated at 3.6% for fiscal 2025, with headline inflation pegged at 12%. Moody’s observed a focus on swifter fiscal consolidation primarily through revenue enhancements, with limited expenditure containment measures.
The government aims for a substantial increase in federal revenue to Rs17.8 trillion, marking a 46% surge from the prior year, driven by a 40% surge in tax revenue through new levies on goods and services alongside robust nominal growth.
Despite revenue augmentation, overall federal government expenditure is targeted at Rs18.9 trillion, up by 25% from the previous year, reflecting a dearth of significant cost-curbing measures and Pakistan’s hefty interest payments.
Subsidies allocation rose by 27% to Rs1.4 trillion, primarily due to amplified subsidies for the power sector, indicating minimal advancements in energy sector reforms.
Additionally, the government announced increments in public sector pensions and salary allocations. Moody’s underscored Pakistan’s allocation of over half its revenue to interest payments, signaling weak debt affordability and elevated debt sustainability risks.
