Pakistan’s Public Finances Set to Remain a Rating Weakness: Fitch

June 19, 2020: Pakistan’s fiscal consolidation targets presented its FY21 budget on 12 June will be challenging to meet amid the economic shock and health crisis associated with the coronavirus pandemic, says Fitch Ratings.

Public finances are a key credit weakness, as Fitch noted even before the health crisis took hold when they affirmed Pakistan’s rating at ‘B-’ with a Stable Outlook in January 2020. Nevertheless, continuing support from the IMF and other official creditors should help the government finance its budget and contain risks associated with the country’s fragile external position.

The government has estimated that Pakistan’s fiscal deficit will reach 9.1% of GDP in the fiscal year ending June 2020 (FY20), against the original budget proposal of 7.1%. 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. Current expenditures were also boosted by the government’s PKR1.2 trillion (2.9% of GDP) support package in March to boost health spending and provide assistance to low-income households.

The new budget forecasts a decline in the fiscal deficit to 7.0% of GDP in FY21. However, this assumes tax revenue will increase by 28% from the estimate for FY20, and will prove challenging in the absence of new tax measures, especially if economic growth remains sluggish. Expenditure is forecast 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 programme. Further expenditure cuts could be implemented if revenues fall short of target.

Fitch’s forecasts are more conservative than the government’s as they expect deficits of 9.5% of GDP in FY20 and 8.2% in FY21, pushing the public debt-to-GDP ratio up to 89% of GDP. This would be above the median level of 66% among Pakistan’s rating peers in that year. Fitch expects 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.

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 USD10.1 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% of GDP through FY21.

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 USD1.8 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.

Pakistan also received USD1.4 billion of emergency support from the IMF under the Rapid Financing Instrument in April, in addition to its existing USD6 billion Extended Fund Facility (EFF). Fitch expects the IMF to be flexible in its programme targets with Pakistan given the magnitude of the pandemic shock, and expect the release of accumulated tranches from the EFF over the coming months. Additional financing has also been forthcoming from other multilateral and bilateral creditors.

Fitch Ratings