Global ratings agency Moody’s said on Friday that the country’s weak ability to repay its debt increases debt sustainability risks, noting that the government spends more than half of its revenue on interest payments.
In comments on the new Finance Bill for FY2025, the ministry said: “The budget estimates that debt service will increase by approximately 18 per cent in FY2025 compared to the previous year.”
“The government is spending more than half of its revenue on interest payment, indicating very weak debt repayment capacity and raising debt sustainability risks,” the report said, adding that “around 55 per cent of FY2025 revenue (Rs 9.8 trillion) will be earmarked for interest payment on government debt.”
The ratings agency said the increased spending reflected “the lack of significant cost containment measures and Pakistan’s very high interest payments.”
Subsidies rose 27 percent to Rs1.4 trillion, “mainly due to a significant increase in subsidies to the power sector,” which was quickly noted as reflecting little progress on energy sector reforms.
The ratings agency said that overall the budget “reflects faster fiscal consolidation, but the ability to continue with reforms will be key to mitigating liquidity risks.”
Moreover, echoing the experts, the agency stressed that the Finance Bill “is likely to support the ongoing negotiations with the IMF on a new Extended Fund Facility (EFF) programme, which will be crucial for the Government of Pakistan to unlock resources from the IMF and other bilateral and multilateral partners to meet its external financing needs.”
But the committee warned that the government’s ability to “continue implementing reforms” will be key to meeting budget targets and unlocking the external financing needed to mitigate liquidity risks.
“Resurgent social tensions due to rising living costs could be exacerbated by tax increases and future adjustments in energy tariffs, weighing on the implementation of reforms,” the report stressed.
“Furthermore, there remains a risk that the coalition government will not have a sufficient electoral mandate to continue implementing difficult reforms.”
According to the report, in its budget proposal, the government has set a consolidated fiscal deficit of 5.9 percent of GDP for fiscal 2025 (estimated 7.4 percent last year) and a primary balance surplus of 2 percent of GDP next fiscal year.
Additionally, the government projects real GDP growth of 3.6 percent and headline inflation of 12 percent. It also aims to increase federal government revenues by 46 percent year-on-year to Rs17.8 trillion through “a combination of new taxes and stronger nominal growth.”
According to the comment, this indicates that “the government is taking few measures to curb spending and is aiming to achieve faster fiscal consolidation mainly through increased revenue.”
Global Outlook Report
Pakistan’s growth is expected to rise to 2.3 percent in FY25, the World Bank said in its Global Economic Prospects report, adding that “industrial activity and confidence are expected to improve, mainly due to easing of import restrictions and easing inflation, although they remain constrained as a result of stringent macroeconomic policies.”
The report said growth is envisaged under “continued sound macroeconomic management, progress in implementing structural reforms, and continued multilateral inflows and bilateral rollovers that should boost investor confidence.”
Regarding inflation, the report noted that “it has eased over the past year due to high base effects and stable exchange rates, but remains elevated.”
On a more positive note, it noted that “foreign exchange reserves increased in several countries, including Pakistan and Sri Lanka, reflecting easing currency pressures and the acceptance of official inflows.”
