Pakistan budget strengthens prospects for IMF deal: Fitch

LONDON: Global agency Fitch Ratings has said that Pakistan’s ambitious financial year (FY2024-25) budget strengthens prospects for an IMF deal.

“It is uncertain whether fiscal targets will be hit, but even assuming only partial implementation of the budget, we forecast the fiscal deficit will narrow. This should reduce external pressures, albeit at a cost to growth,” Fitch Ratings says.

The FY25 (fiscal year ending 30 June 2025) budget draft, released on 13 June, is the first presented by the coalition government of Prime Minister Shehbaz Sharif.

It projects a headline deficit of 5.9 per cent of GDP and a 2.0 per cent primary surplus (FY24 estimate: 7.4 per cent and 0.4 per cent, respectively), on wide-ranging tax increases, and also significant fiscal efforts at the provincial level. The budget includes significantly more developmental spending, and sees growth accelerating to 3.6 per cent in FY25 (FY24: 2.4pc).

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“These plans could face stiff resistance inside parliament – from both coalition partners and opposition parties – and among broader society, after the close outcome of the February elections delivered a weaker-than-expected mandate for Mr. Sharif’s PML-N party. Our updated fiscal forecasts assume partial implementation and project a primary surplus of 0.8 per cent, on shortfalls in revenue generation and an overshoot in current spending, partly offset by under-execution in development spending. We believe tight policy settings may depress growth more than the government expects, and have reduced our growth forecast to 3.0 per cent for FY25, from 3.5 per cent, despite some improvements in short-term indicators of economic activity,” Fitch Ratings says.

Nevertheless, Fitch Ratings says, “the FY24 primary deficit is in line with the target, and the authorities have undertaken unpopular subsidy reforms over the past year, supporting fiscal credibility. While Pakistan has a poor record of sustaining reforms over time, the absence of viable alternatives has strengthened support for tough policy decisions, at least in the near term. Pakistan completed its nine-month IMF Stand-By Arrangement in April, and in May the IMF reported “significant progress” toward agreeing a new Extended Fund Facility (EFF).”

Fitch Ratings has also said that it expected inflation to remain at (12 per cent) and interest cost to decline in Pakistan during the upcoming fiscal year 2024-25.