KARACHI:
Moody’s Ratings reported on Friday that Pakistan’s federal government has raised tax rates in the 2024-25 budget to generate higher revenue, moving towards winning the International Monetary Fund (IMF) loan program and unlocking additional funding from multilateral and bilateral partners.
At the same time, however, it saw a significant increase in subsidies, particularly in the electricity sector, which showed the government’s inability to undertake promised structural reforms amid a weaker coalition government.
Additionally, an 18% jump in debt interest payments to Rs9.8 trillion is equivalent to half of estimated earnings, suggesting a “weak debt affordability leading to high debt sustainability risks,” the global ratings agency said in a commentary with headline “Budget reflects faster fiscal consolidation, but ability to sustain reforms will be key to easing liquidity risks.”
“The budget announced will likely support Pakistan’s ongoing negotiations with the IMF on a new Enhanced Facility Facility (EFF) program that will be crucial for the government to unlock funding from the IMF and other bilateral and multilateral partners to cover external financing needs”.
He pointed out that subsidies allocated from the budget rose by 27% to Rs 1.4 trillion, mainly due to large increases in power sector subsidies, reflecting limited progress in energy sector reforms. “The government also increased public sector pensions and wages.”
The government spends more than half of its revenue on interest payments, indicating very weak debt affordability. Budget estimates showed a roughly 18 percent increase in debt service payments for fiscal 2025 compared to a year ago.
About 55% of FY 2025 revenue (Rs 9.8 trillion) is earmarked for interest payments on public debt. Allocating a significant share of the budget to debt service will limit the government’s ability to service its debt while meeting basic social spending and infrastructure needs.
He said the government’s ability to sustain reform implementation would be key to enabling Pakistan to meet its fiscal targets and continuously unlock external financing, leading to a sustained easing of liquidity risks.
“A resurgence of social tensions due to the high cost of living (which may increase due to higher taxes and future adjustments to energy tariffs) could affect the implementation of the reform. In addition, there are still risks that the coalition government will not have a strong enough electoral mandate to consistently implement difficult reforms.”
The government announced a consolidated budget deficit (federal and provincial) of 5.9% of GDP for fiscal 2025, down from an estimated 7.4% of GDP for fiscal 2024.
The primary balance is projected to be in surplus at 2% of GDP in fiscal 2025, up from around 0.4% in fiscal 2024. The government projects real GDP growth to 3.6% in fiscal 2025 and headline inflation at 12%.
The budget showed that the government sought to achieve faster fiscal consolidation mainly through revenue increases, with minimal expenditure containment measures.
The government has set a challenging target of significantly increasing federal government revenue to Rs 17.8 trillion, about 46% higher than a year ago.
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