Global credit rating agency Moody’s has stated that Pakistan’s newly announced budget for fiscal year 2024-25 could potentially support ongoing negotiations with the International Monetary Fund (IMF) for a new Extended Fund Facility (EFF).
However, the agency also expressed concerns about the potential for social unrest due to high inflation, which could hinder the government’s ability to implement necessary reforms.
The budget, which aims for a modest 3.6% growth, prioritizes fiscal consolidation through tax increases and projected nominal growth. This approach is seen as a positive step towards securing IMF financing and addressing Pakistan’s external financing needs.
Moody’s emphasized that the government’s ability to sustain reform implementation will be crucial for achieving budget targets and unlocking external financing, ultimately easing liquidity risks.
The agency warned that rising social tensions fueled by high living costs, potentially exacerbated by higher taxes and future energy tariff adjustments, could impede reform efforts.
Additionally, Moody’s highlighted the risk of the coalition government’s limited electoral mandate impacting its ability to implement difficult reforms.
The budget projects a consolidated (federal and provincial) budget deficit of 5.9% of GDP for fiscal 2025, a decrease from an estimated 7.4% for fiscal 2024. The primary balance is set at a surplus of 2.0% of GDP for fiscal 2025.
Real GDP growth is projected at 3.6% for fiscal 2025, with headline inflation estimated at 12%.
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Moody’s noted that the budget focuses on achieving faster fiscal consolidation primarily through revenue increases, with limited spending containment measures. The government aims to significantly increase federal government revenue to Rs17.8 trillion, a 46% increase from the previous year.
This increase is driven by a 40% rise in tax revenue, achieved through new taxes on various goods and services, as well as stronger nominal growth.
Despite the revenue increase, the budget targets overall federal government expenditure of Rs18.9 trillion, a 25% increase from the previous year. This increase reflects a lack of significant cost-containment measures and Pakistan’s high interest payments.
The budget allocated subsidies increased by 27% to Rs1.4 trillion, primarily due to increased subsidies for the power sector, highlighting limited progress in energy sector reforms.
The government also announced an increase in public sector pensions and salary budgets.
Moody’s highlighted that Pakistan spends more than half its revenue on interest payments, indicating weak debt affordability and high debt sustainability risks.
