Moody’s disputes govt’s growth assumption

ISLAMABAD: The Government of Pakistan’s budget lacks major revenue-raising or spending-containment measures to alleviate intense government liquidity pressures, says Moody’s Investors Services (Moody’s).

The Rating Agency in its latest report on Pakistan stated that 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. Pakistan’s very weak debt affordability drives high debt sustainability risks.

Pakistan is unlikely to access market financing at affordable costs, either from Eurobonds or commercial banks, in the foreseeable future. In fiscal 2023, the government issued no Eurobonds and raised only Rs521 billion from commercial banks, far short of the Rs1.4 trillion it targeted in the fiscal 2023 budget.

Moody’s says chances of Pakistan securing IMF bailout dwindling: report

The country’s external debt repayment will remain high for the next few years, with about $25 billion of repayments (principal and interest) due in fiscal 2024. Foreign exchange reserves are very low at $3.9 billion as at 2 June. However, Pakistan’s external funding prospects for fiscal 2024 and later are highly uncertain.

It is not guaranteed that Pakistan will be able to secure $2.4 billion from the IMF as budgeted. Whether Pakistan will join another IMF programme may only become clear after elections, which are due by October 2023. Negotiations for any future IMF programme would also take some time, even if they succeed. Until a new programme is agreed, Pakistan’s ability to secure loans from other bilateral and multilateral partners will be severely constrained.

The Agency stated that on 9 June, the government of Pakistan (Caa3 stable) presented its fiscal 2024 (ending June 2024) budget to Parliament. The consolidated (federal and provinces) budget was projected at Rs19.5 trillion. The budget deficit is estimated at 6.5 percent of GDP, narrowing from an estimated deficit of 7.0per cent in fiscal 2023.

Real GDP growth is projected at 3.5per cent for fiscal 2024, up from 0.3per cent in fiscal 2023 and headline inflation at 21per cent versus 29per cent in fiscal 2023. We consider the deficit estimates and growth projections to be optimistic, given the stresses the economy is facing, in particular government liquidity and external vulnerability pressures, exacerbated by the severe floods of August 2022, that will continue to weigh on economic activity over fiscal 2024.

At the same time, the budget does not contain significant revenue-raising or spending-containment measures. 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 Rs2.8 trillion for grants and subsidies in fiscal 2024, compared with an estimated PKR2.0 trillion in fiscal 2023. However, Pakistan’s low revenue/GDP (stable at around 12per cent from 2019-22) is a major constraint on the government’s debt affordability and debt burden. The budget targets fiscal 2024 tax revenue at Rs9.2 trillion, up 28per cent from an estimated Rs7.2 trillion in fiscal 2023.

About 60per cent of the fiscal 2024 budget (Rs11.7 trillion) 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 Rs6.35 trillion ($21 billion) of loans from external sources, including $1.5 billion from Eurobond issuances, $4.6 billion from commercial banks, $2.4 billion from the IMF and another $2.7 billion from other multilateral partners.

The government expects most of the remaining sums to come from other bilateral partners, including China (A1 stable), Saudi Arabia (A1 positive) and the United Arab Emirates (Aa2 stable).

While quoting media reports, Moody’s stated that Finance Minister Ishaq Dar said at the post-budget press conference 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 12 June 2023.

Under our definition, a suspension of debt service obligations only to official creditors is unlikely to have direct rating implications. Indeed, such relief would increase the government’s available fiscal resources for essential health, social and infrastructure spending.

Our 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 our ratings, it added.

Copyright Business Recorder, 2023