Budget may help govt in bid for new IMF loan: Moody’s

KARACHI: Pakistan’s newly-announced budget for fiscal year 2025 is expected to support the country’s ongoing negotiations with the International Monetary Fund (IMF) for a fresh bailout, but sustaining reforms will be key to meeting the budget targets and unlock financing from the external partners, said a Moody’s report on Friday.

“A resurgence of social tensions on the back of high cost of living (which may increase because of higher taxes and future adjustments to energy tariffs) could weigh on reform implementation,” Moody’s Ratings, a global credit rating agency said.

“Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain,” it added.

The government presented its fiscal 2025 (ending June 2025) budget to Parliament on Wednesday. The budget 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 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,” it said.

“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,” it added.

The government announced a consolidated (federal and provinces) budget deficit of 5.9 percent of GDP for FY25, narrowing from an estimated 7.4 percent for fiscal 2024. The primary balance is set at a surplus of 2.0 percent of GDP, from around 0.4 percent for the last fiscal year. The government projects real GDP growth at 3.6 percent and headline inflation at 12 percent.

According to the report, 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 46 percent higher from a year ago,” it said.

“The increase in revenue is led by a 40 percent increase in tax revenue that the government seek to achieve through a combination of new taxes (for example, higher taxes on cars, cement, steel, gas and diesel) and stronger nominal growth,” it added.

Overall, the government targets an increase in revenue/GDP to 14.3 percent in FY25 from 11.5 percent in FY24.

Moody’s noted that the budget is targeting an overall federal government expenditure of Rs18.9 trillion, about 25 percent higher than a year ago. “The increase in expenditure reflects lack of significant cost-containment measures and Pakistan’s very high interest payments,” it noted. The budget allocated subsidies increased by 27 percent 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.

Meanwhile, the government spends more than half its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks, according to the report.

The budget estimated debt servicing payments to have increased by about 18 percent for FY25. About 55 percent of 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.”