Global rating agency Moody’s has highlighted significant concerns regarding Pakistan’s debt sustainability in light of the newly presented finance bill for fiscal year 2024-25. The budget estimates a considerable increase in debt servicing payments, rising by about 18% compared to the previous year.
“The government spends more than half its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks,” Moody’s noted. Specifically, about 55% of fiscal year 2025 revenue, amounting to Rs9.8 trillion, is earmarked for interest payments on government debt.
Subsidies and Energy Sector Reforms
The increase in government expenditure is partly attributed to a 27% rise in subsidies, totaling Rs1.4 trillion, primarily directed at the power sector. This significant allocation underscores the minimal progress in energy sector reforms.
The rating agency pointed out that these subsidies reflect a lack of substantial cost-containment measures, further exacerbating Pakistan’s fiscal challenges. “The increase in expenditure reflects the lack of significant cost-containment measures and Pakistan’s very high interest payments,” Moody’s commented.
Budget and IMF Negotiations
The new budget also plays a crucial role in Pakistan’s ongoing negotiations with the International Monetary Fund (IMF) for a new Extended Fund Facility (EFF) program. This program is vital for unlocking additional financing from the IMF and other bilateral and multilateral partners, which is essential for meeting Pakistan’s external financing needs.
However, Moody’s warned that the government’s ability to sustain reform implementation will be key to achieving budget targets and easing liquidity risks. “A resurgence of social tensions on the back of high cost of living — which may increase because of higher taxes and future adjustments to energy tariffs — could weigh on reform implementation,” the agency cautioned.
Fiscal Consolidation and Revenue Goals
The budget outlines a consolidated deficit of 5.9% of GDP for fiscal year 2025, down from an estimated 7.4% in the previous year. The primary balance is projected to be a surplus of 2% of GDP. The government aims to increase federal revenue to Rs17.8 trillion, a 46% increase from the previous year, driven by new taxes and stronger nominal growth.
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Moody’s observed that the budget aims for quicker fiscal consolidation primarily through revenue increases, with little emphasis on spending containment. “The government seeks to achieve quicker fiscal consolidation mainly through revenue increases,” the report stated.
Economic Projections and Challenges
The World Bank’s Global Economic Prospects report forecasts Pakistan’s growth to pick up to 2.3% in FY25, with improvements in industrial activity and confidence due to easing import restrictions and moderating inflation.
However, the growth outlook remains constrained by tight macroeconomic policies. Inflation has moderated over the past year due to high base effects and exchange rate stabilization, but it remains high. The report also noted an increase in foreign exchange reserves in Pakistan, reflecting easing currency pressures and receipt of official flows.
Moody’s underscores that while the new budget supports fiscal consolidation and ongoing IMF negotiations, significant challenges remain in terms of debt sustainability and reform implementation. The government’s ability to manage social tensions and maintain a strong electoral mandate will be crucial in addressing these issues and achieving long-term economic stability.