By Staff Reporter
KARACHI: Pakistan’s budget for fiscal 2025 targets quicker fiscal consolidation, but the country’s debt affordability remains weak, posing high debt sustainability risks, rating agency Moody’s said on Friday.
“The budget estimated debt servicing payments to have increased by about 18 percent for fiscal 2025 compared with a year ago,” Moody’s said in a report. “The government spends more than half its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks.”
About 55 percent of fiscal year 2025 revenue (Rs9.8 trillion) is earmarked for interest payments on the government’s debt, the report noted.
Moody’s said the budget reflected “quicker fiscal consolidation, but ability to sustain reforms will be key to easing liquidity risks”.
The finance bill “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”.
The report said the government’s ability to sustain reform implementation will be key to meeting the budget targets and unlocking external financing, which is necessary for easing of liquidity risks.
However, the rating agency warned that “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”.
Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain.
“The government seeks to achieve quicker fiscal consolidation mainly through increases in revenue, with little spending-containment measures, Moody’s said. “The announced budget will likely support Pakistan’s ongoing negotiations with the IMF for a new EFF that will be crucial for the government to unlock financing from IMF and other bilateral and multilateral partners to meet its external financing needs.”
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, Moody’s added.
The government has set a challenging target to substantially increase federal government revenue to Rs17.8 trillion, about 46% higher from a year ago. The increase in revenue is led by a 40% increase in tax revenue that the government seeks to achieve through a combination of new taxes (for example, higher taxes on cars, cement, steel, gas, and diesel) and stronger nominal growth.
Overall, the government targets an increase in revenue/GDP to 14.3 percent in fiscal 2025 from 11.5 percent in fiscal 2024. At the same time, the budget is targeting an overall federal government expenditure of Rs8.9 trillion, about 25 percent higher than a year ago.
The increase in expenditure reflects a lack of significant cost-containment measures and Pakistan’s very high interest payments, Moody’s said. 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.
“Pakistan’s very weak debt affordability drives high debt sustainability risks,” Moody’s said. “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.”
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