Fitch says Pakistan’s budget goal overly ambitious

KARACHI: Global credit rating agency Fitch Ratings said Pakistan fiscal targets for the next fiscal year will be challenging to meet amid the economic shock and health crisis associated with the coronavirus pandemic.

“Public finances are a key credit weakness, as we noted even before the health crisis took hold when we affirmed Pakistan’s rating at ‘B-’ with a stable outlook in January 2020,” Fitch said in a statement. “Nevertheless, continuing support from the IMF (International Monetary Fund) and other official creditors should help the government finance its budget and contain risks associated with the country’s fragile external position.” The government estimated fiscal deficit to reach 9.1 percent of GDP in FY2020, against the original budget proposal of 7.1 percent. The new budget forecasts a decline in the fiscal deficit to 7 percent of GDP in FY2021.

Since this assumes tax revenue will increase 28 percent from the estimate for FY20, it “will prove challenging in the absence of new tax measures, especially if economic growth remains sluggish,” said Fitch.

“Revenues fell short of target, due both to the economic fallout from the pandemic and the fact that the budget goal was overly ambitious, in our view,” it said. “Current expenditures were also boosted by the government’s Rs1.2 trillion (2.9 percent of GDP) support package in March to boost health spending and provide assistance to low-income households.” Fitch’s forecasts are more conservative than the government’s and it expected deficits of 9.5 percent of GDP in FY2020 and 8.2 percent in FY2021, pushing the public debt-to-GDP ratio up to 89 percent of GDP. This would be above the median level of 66 percent among Pakistan’s rating peers in that year.

“We expect that the ratio will begin to fall after FY21, but this remains contingent on the government’s ability to make progress in fiscal consolidation and on GDP growth rates,” it said. The budget forecast expenditure to decline modestly as a share of GDP, although the government aims to boost healthcare spending and support to low-income households through its Ehsas program. Fitch said further expenditure cuts could be implemented if revenues fall short of target.

Fitch said the government’s limited fiscal headroom within its rating category will constrain its ability to provide a more robust fiscal response to the coronavirus. The number of COVID-19 cases continues to rise rapidly, increasing by over 40,000 in the week to 15 June.

The country’s rating also reflects a fragile external position given the sovereign’s high external debt repayments. Liquid foreign exchange reserves remain low at around $10.1 billion, but import compression has increased reserve import cover to about 3.6 months. Moreover, lower oil prices are expected to offset the decline in remittances, which will keep the current account deficit stable at around 2 percent of GDP through FY2021. External liquidity will be supported by the country’s participation in the G-20’s debt service suspension initiative, which the government estimates will delay servicing payments in 2020 of around $1.8 billion. The initiative involves only bilateral creditors at present and the Pakistani government has indicated that it has no plans to seek private-sector debt service suspension.