High debt sustainability risks” are caused by Pakistan’s low loan affordability, according to Moody’s
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High debt sustainability risks” are caused by Pakistan’s low loan affordability, according to Moody’s

Moody’s global rating agency has stated on Friday that despite the country’s improving external balances and foreign reserve position, the government’s low debt affordability leads to relatively high debt sustainability risks and it added that the government meets more than half of its revenues on debt servicing costs.

In its comment on the newly finance bill for the FY 2025 it said, “The budget estimated debt servicing payments, it predicted to rise as much as about 18pc for the fiscal year 2025 from the past one year.”

“This is evident in the fact that for every 100pc of its revenue, the government spends more than 50pc on interests, thus showing extremely low debt affordability, which leads to high debt sustainability vulnerabilities,” it said whereas “Out of Rs9.8tn revenue required in fiscal year 2025, about 55pc will goes towards paying interests on the government’s liabilities”.

However, expressing concern over relative increase in expenditure, the rating agency observed that there was “little evidence of substantial measures undertaken to contain cost and extremely high interest payments of Pakistan”.

It was swift to add that the subsidies stood at Rs. 1.4 trillion: up by 27pc mainly dominated by the subsidies provided to the power sector, which indicated that there was very little headway in energy sector reforms.

The rating agency in review commented that the budget signaled ‘faster fiscal consolidation’ but clarified that ‘ability to sustain reforms will determine ability to reduce liquidity risks’.

Similarly, the agency compared with the expert connotations and emphasize that the Finance Bill “is likely to facilitate the ongoing parlays with IMF for a new EFF programme, which will be essential for the government to access financing from IMF and other bilateral and multilateral partners in order to address its external financing requirements”.

It pointed out that the capacity of the government to sustain reform implementation “will be critical to attain the budgetary targets and catalyze external financing, which is crucial in managing the liquidity risks ahead”.

It noted that such ‘a social tension with renewed higher cost of living is likely to limit reform implementation where the cost of living is likely to rise due to increments in taxes and future adjustments to energy tariffs.’

“However, potentials of the new coalition government not having a sufficient electoral base that would allow for constant adjustment that entails reforms that will be unpopular among the electorate still linger.”

According to the report, in the budget, the government had also projected the gross Federal consolidated budget deficit at 5.9 percent of the GDP for fiscal year 2025 compared to the estimated 7.4pc for the previous year with the primary balance at a surplus of 2pc of GDP in the next year.

Also, the government has estimated programmed real GDP at 3.6 percent and the headline inflation rate at 12 percent. It also aimed at mobilizing more revenue for the federal government from Rs12.4 trillion in the previous year to a new level of Rs17.8 trillion – an increase of 46% and using “new taxes and higher nominal growth rates”.

This clearly implies that through its comment on the budget, the government intends to pursue a faster pace of fiscal consolidation primarily via a boost in revenues more so with little or no regard to spending restraint measures.

Global prospects report

According to the ‘Global economic prospects’ report published by the World Bank, Pakistan’s growth will begin to rise at the rate of 2.3pc in the FY25; while for industrial activity and confidence mainly due to relaxation in import bans and decreasing inflations its prospects were noted as to improve but remain restricted by the tight macroeconomic policies.

The report also stated that the assumption of increased growth is made based on continued sound macroeconomic management, progress with structural reforms, multilateral inflows and bilateral rollovers that will improve investor confidence.

On the issue of inflation, the report highlighted and said that inflation has, however, stabilized over the past year because of high base effects along with the stabilization of the exchange rate but it remains high.

Positively, it stated that “foreign exchange balances have increased in a few nations, including Sri Lanka and Pakistan, reflecting the inflow of official outflows and a decreasing of currency pressure.”

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