Pakistan was exposed to external funding conditions and policy missteps as the country needs around $20 billion per year in the FY2024- FY25, the global ratings agency Fitch said on Tuesday.

“Pakistan’s projected funding needs still exceed reserves including maturing bilateral debt that we expect will continue to be rolled over,” the US-based Fitch Ratings — one of three leading global rating agencies — said in its report.

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

This comes almost a week after the South Asian country presented its annual outlay of Rs18.87 trillion in Parliament amid noise from the opposition. Finance Minister Muhammad Aurangzeb, who presented the deficit budget, informed the National Assembly that Pakistan was seeking an Extended Fund Facility from the International Monetary Fund.

In a live address to the nation before Eid, Prime Minister Shehbaz expressed hope that it would be Pakistan’s last loan programme that would help it leave behind neighbouring countries which include India.

The government has set a challenging tax revenue target of Rs13 trillion for the year starting July 1, a near 40% jump from the current year, in its national budget.

According to the ratings agency, Pakistan’s ‘CCC’ rating, affirmed in December 2023, reflected high external funding risks amid high medium-term financing requirements.

It was of the view that the budget looked to strengthen the case for a new bailout deal with IMF, but it was uncertain whether fiscal targets “will be hit, but even assuming only partial implementation of the budget, we forecast the fiscal deficit will narrow.”

It should reduce external pressures, albeit at a cost to growth, the report said.

Key objectives for the upcoming fiscal year include bringing the public debt-to-GDP ratio to sustainable levels and prioritising improvements in Pakistan’s balance of payments position, the government’s budget document showed.

Pakistan has projected a sharp drop in its fiscal deficit for the new financial year to 5.9% of GDP, from an upwardly revised estimate of 7.4% for the current year.

Pakistan will look to widen the tax base to avoid burdening existing taxpayers to meet its targets, the finance minister said on June 12.

Fitch added that the government might face stiff resistance from both coalition partners and opposition parties.

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

According to the agency, tight policy settings might depress growth more than the government expects, and reduced its growth forecast to 3.0% for FY25, from 3.5%, despite some improvements in short-term indicators of economic activity.

“Government debt looks set to decline to 68% of GDP by FYE24 due to high inflation and deflator effects, offsetting soaring domestic interest costs,” it said and added that inflation and interest costs would further decline

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

External liquidity and funding were still Pakistan’s key credit challenges, despite stable debt dynamics, the report said.

Aurangzeb had informed lawmakers that more than half of the country’s budget would go into interest payments.

The agency called for tight policy settings to keep external financing needs in check. It added that maintaining compliance with a new EFF could become increasingly challenging.