Moody’s supports govt commitment to moderate fiscal deficit in 2017/18

KARACHI: US credit rating agency Moody’s on Tuesday supported the government’s ability to keep up with the fiscal deficit target set for the next fiscal year, but it doubted the possibility of growth target’s attainability due to uplift fund constrains at the provincial level.

“The Pakistan government’s (B3 stable) re-assertion of its commitment to moderate deficits when it released its FY2018 budget is credit positive for the sovereign, but the level of execution risk for the budget is high,” Moody’s Investors Service said in a news statement.

Finance Minister Ishaq Dar, in his budget speech on 26 May, announced a 4.1 percent of GDP fiscal deficit target for 2017/18, similar to the 4.2 percent provisional estimate for the current fiscal year, and much lower than a peak of more than 8.1 percent in FY13.

Moody’s termed the country’s commitment to moderate deficits as credit positive. “…debt burden, at nearly 67 percent of GDP in 2016, and large gross borrowing requirements, at nearly 32 percent of GDP, are constraints on the sovereign rating,” it warned however.

“In particular, we expect further revenue collection shortfalls and pressure to increase current spending before the 2018 general election,” it said. Moody’s said the budget targets higher development spending-led growth.

“Implementation of the budget measures -- as stated in the federal budget for the fiscal year ending June 2018 -- would support Pakistan's credit profile by helping to relieve supply-side infrastructure bottlenecks, which constrain the country's economic development,” it added.

“Budget execution risk is high, given ambitious GDP growth and revenue assumptions, as well as limited institutional capacity to spend development funds.” The government set a 6 percent growth target for FY18 compared with an estimate growth of 5.3 percent in FY17.

APP adds: Pakistan’s economy will grow five percent during the next fiscal year, Moody's said in a report titled, “Budget Commitment to Moderate Deficit Is Credit Positive; Targets Are Ambitious”.

“We expect real GDP growth to be closer to 5.0 percent in both FY2017 and FY2018, due primarily to CPEC (China-Pakistan Economic Corridor) project implementation risks and capacity constraints on government development spending,” it said. Moody’s expected the fiscal deficit to be wider than the government forecasts, at about 4.7 percent of GDP in FY17 and five percent of GDP in FY18.

On the revenue side, the government projected approximately 11 percent increase in revenue in FY18 over FY17. "Given our forecast of about 10 percent nominal GDP growth in FY2018, this implies a tax buoyancy of around 1.4, which would indicate a high degree of tax revenue responsiveness to movements in GDP,” it said.

Moody’s Investors Service further said the government projects around a two percent increase in current expenditure and a 40 percent increase in development spending relative to downwardly revised estimates for FY17.

In past years, limited capacity to spend budgeted development funds restricted such expenditure, particularly at the provincial level. “We believe it will be difficult for the government to fully realise its ambitious development spending targets this year, absent material institutional strengthening,” it added.