June 15, 2023 (MLN): The Federal Budget for the fiscal year 2023-24 lacks major revenue-raising and spending-containment measures to alleviate intense government liquidity pressures, Moody's said in the report issued on Thursday.
The budget provides a wide range of relief measures for households and businesses. A large share of the increase in expenditure goes towards salaries and pensions for government employees.
Total employee-related expenses are budgeted at Rs1.2 trillion, compared with the estimated spending of Rs960 billion in fiscal 2023. In addition, the government earmarked Rs2.8tr for grants and subsidies in FY24, compared with an estimated Rs2tr in FY23.
However, Pakistan’s low revenue/GDP (stable at around 12% from 2019-22) is a major constraint on the government’s debt affordability and debt burden, the report highlighted.
The budget targets fiscal 2024 tax revenue at Rs9.2tr, up 28% from an estimated Rs7.2tr in fiscal 2023.
Given a lack of new significant revenue-raising measures, the government's revenue projections rely mainly on the assumption that nominal GDP growth will be high and support an increase in revenue.
"In the current context, we see significant downside risks to that assumption," the report reads.
Pakistan’s very weak debt affordability drives high debt sustainability risks:
About 60% of the fiscal 2024 budget Rs11.7tr goes towards servicing interest and principal payments on the government's debt.
Having a significant share of its budget going towards debt payments will constrain the government’s capacity to service its debt while meeting the population’s essential social spending and infrastructure needs.
Pakistan’s government liquidity and external positions remain fragile:
The budget projects Rs6.35tr ($21bn) of loans from external sources, including $1.5bn from Eurobond issuances, $4.6bn from commercial banks, $2.4bn from the IMF, and another $2.7bn from other multilateral partners.
The report further warned that Pakistan is unlikely to access market financing at affordable costs, either from Eurobonds or commercial banks, in the foreseeable future.
In FY23, the government issued no Eurobonds and raised only Rs521bn from commercial banks, far short of the Rs1.4tr it targeted in FY23.
External debt repayment will remain high for the next few years:
With about $25bn of repayments (principal and interest) due in FY24. Meanwhile, foreign exchange reserves are very low at $3.9bn as of June 2.
However, Pakistan's external funding prospects for FY24 and later are highly uncertain. It is not guaranteed that Pakistan will be able to secure $2.4bn from the IMF as budgeted.
Whether Pakistan will join another IMF program may only become clear after elections, which are due by October 2023. Negotiations for any future IMF program would also take some time, even if they succeed.
Until a new program is agreed, Pakistan's ability to secure loans from other bilateral and multilateral partners will be severely constrained.
Recently, Finance Minister Ishaq Dar said that the government is looking at rescheduling bilateral debts, but it does not plan to approach the Paris Club or multilateral partners to reschedule their debt.
However, the central bank governor, Jameel Ahmed, was subsequently reported as saying that there was no plan for Pakistan to enter into any debt restructuring at a briefing following its monetary policy decision on June 12, 2023.
"Under our definition, a suspension of debt service obligations only to official creditors is unlikely to have direct rating implications," the report noted.
Indeed, such relief would increase the government's available fiscal resources for essential health, social, and infrastructure spending.
Moody's sovereign issuer rating reflects the probability of default and financial loss experienced by private creditors. Should private-sector creditors be affected, it would likely entail a default event on private-sector debt and would be captured in ratings.
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Posted on: 2023-06-15T16:20:11+05:00