Moody’s projects Pakistan’s fiscal deficit at 9.5-10pc in FY2020

KARACHI: Rating agency Moody’s sees contraction in Pakistan’s tax revenues in the second half with the fiscal deficit likely to widen at 9.5 to 10 percent of GDP in the current fiscal year from 8.9 percent a year earlier because of economic ramifications of the coronavirus and the government’s stimulus package.

Moody’s Investors Service said government revenue in the first half rose almost 40 percent year-on-year, with tax revenue up 18 percent and nontax revenue more than doubling in part because of higher profits from the central bank.

“Nevertheless, tax revenue is likely to contract in the second half compared with the year-ago period, although higher-than-budgeted central bank profits, lower-than-budgeted interest payments and fiscal savings from lower oil prices will mitigate the effect of the contraction on the deficit,” it said in an analysis post-rapid financing disbursement by the IMF.

Moody’s expected the country’s financing needs to rise because of coronavirus-related economic effects and the government’s Rs1.2 trillion – $7 billion, 2.7 percent of GDP – stimulus package, approved last month. The stimulus provides tax concessions for households and businesses, including the export and healthcare sectors, and direct cash handouts to support socially vulnerable and low-income earners laid off because of the coronavirus outbreak.

“Consequently, we expect the stimulus to widen the government deficit to 9.5-10 percent of GDP in fiscal 2020 from 8.9 percent in fiscal 2019 despite strong revenue growth narrowing the deficit in the first half of fiscal 2020,” it said.

Moody’s expected general government debt to rise to around 87 percent of GDP by June-end from around 83 percent a year earlier and gradually decline in subsequent years. The fiscal deficit is expected to narrow to 8-8.5 percent of GDP next fiscal year given the government’s commitment to fiscal consolidation under the International Monetary Fund’s $6 billion loan program approved last year. The lender also released $1.4 billion of another loan to support balance of payment amid COVID-19.

The credit rating agency expected the funding from various lenders to cover the government’s additional external financing needs in FY2020.

Moody’s said the G20’s recent offer of debt relief to low-income countries would also support Pakistan by deferring principal and interest payments on bilateral debt due between May and December. The deferrals might be extended and involve other creditors. Debt relief by official-sector creditors would provide additional but very modest spending capacity for Pakistan, whose interest payments on foreign-currency debt are around 0.6 percent of GDP for fiscal 2021.

Moody’s expected Pakistan’s real GDP to contract modestly by 0.1-0.5 percent in the current fiscal year – the country’s first annual recession – with the economy gradually recovering to grow by more than 2 percent in FY2021.

“Although the country’s export sector accounts for just 9 percent of GDP and tourism accounts for just 2 percent of GDP, the nationwide lockdown to curb the coronavirus will significantly curtail domestic consumption and pose downside risks to economic growth, which threatens a wider fiscal deficit and a higher government debt burden than we currently project,” it said. “Despite the month-long lockdown, the government allowed labour-intensive industries such as agriculture, construction and textiles to resume operations on 15 April, which should aid a gradual recovery in domestic consumption.”

The rating agency said the central bank’s cumulative 425-basis-point policy rate cuts since the start of 2020 and facilities to ease the liquidity crunch for businesses and provide cheap loans to the industrial and construction sectors further buffer the economic shock related to coronavirus.