Pakistan’s revenue goals in new budget critical for IMF support: Moody’s

WEB DESK: Moody’s Ratings, a global credit rating agency, expressed that Pakistan’s newly-announced budget for fiscal year 2024-25 could facilitate Islamabad’s ongoing negotiations with the International Monetary Fund (IMF) for a new Extended Fund Facility (EFF).

However, the agency cautioned that high inflation and resulting social tensions might hinder the government’s reform agenda.

On Wednesday, Finance Minister Muhammad Aurangzeb unveiled Pakistan’s federal budget for 2024-25, targeting a 3.6 per cent growth rate for the upcoming fiscal year. This budget aims to satisfy the IMF’s requirements while addressing Pakistan’s fiscal challenges through increased taxation.

Currently, Pakistan is negotiating with the IMF for a more extensive programme to achieve long-term macroeconomic stability. Moody’s highlighted that the budget outlines rapid fiscal consolidation, primarily through tax increases and stronger nominal growth projections.

“The budget will likely support Pakistan’s ongoing negotiations with the IMF for a new EFF, crucial for unlocking financing from the IMF and other international partners to meet external financing needs,” Moody’s stated.

Nevertheless, the agency stressed that the government’s sustained implementation of reforms is vital for meeting budget targets and easing liquidity risks.

Moody’s warned that rising living costs due to higher taxes and potential energy tariff adjustments could exacerbate social tensions, threatening reform efforts. Additionally, the agency expressed concerns over the coalition government’s electoral mandate strength to persist with challenging reforms.

The budget for FY25 sets a target to boost federal revenue to PKR 17.8 trillion, a 46 per cent increase from the previous year, driven by a 40 per cent hike in tax revenue through new taxes on vehicles, cement, steel, gas, and diesel, along with stronger nominal growth. The government aims to raise the revenue-to-GDP ratio to 14.3 per cent in 2025 from 11.5 per cent in 2024.

Conversely, federal expenditure is projected to rise by 25 per cent to PKR 18.9 trillion, reflecting limited cost-containment measures and substantial interest payments. Subsidies, particularly in the power sector, will increase by 27 per cent to PKR 1.4 trillion, underscoring slow progress in energy reforms. Public sector pensions and salary budgets will also see increments.

Moody’s highlighted that over half of the government’s revenue is allocated to interest payments, illustrating weak debt affordability and significant debt sustainability risks. For fiscal 2025, debt servicing payments are estimated to rise by 18 per cent, with 55 per cent of revenue earmarked for interest payments on government debt.

The agency concluded that the high allocation towards debt payments restricts the government’s ability to address essential social spending and infrastructure needs, posing a challenge to fiscal sustainability.

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Web Desk