Fitch Ratings says Pakistan’s ‘ambitious’ budget strengthens IMF deal prospects

Fitch Ratings on Tuesday called Pakistan’s budget for fiscal year 2024-25 “ambitious”, but stressed that it strengthens prospects for a deal with the International Monetary Fund (IMF).

“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,” it said in the commentary.

Pakistan’s budget to support negotiations with IMF for new programme: Moody’s

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

“It projects a headline deficit of 5.9% of GDP and a 2.0% primary surplus (FY24 estimate: 7.4% and 0.4%, 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% in FY25 (FY24: 2.4%).”

Pakistan Finance Minister Muhammad Aurangzeb last week unveiled the budget targeting a modest 3.6% growth for the coming fiscal year, as Islamabad looked to appease the IMF and balance its burgeoning books with higher taxation.

The budget was announced with a total outlay of Rs18.9 trillion (up 30% compared to the budgeted outlay of FY24), and gross revenue receipts were expected at Rs17.8 trillion. The Federal Board of Revenue (FBR) taxes are envisaged at Rs12.97 trillion, an amount nearly 38% higher than the outgoing fiscal year.

We protected the salaried class, says finance minister Aurangzeb after budget speech

With an ambitious tax target, Islamabad is hoping that the IMF will give its green signal to Pakistan’s pursuit of a larger, longer bailout.

Fitch Ratings said 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 Shehbaz Sharif’s Pakistan Muslim League-Nawaz (PML-N).

“Our updated fiscal forecasts assume partial implementation and project a primary surplus of 0.8%, on shortfalls in revenue generation and an overshoot in current spending, partly offset by under-execution in development spending,” Fitch Ratings added.

“We believe tight policy settings may depress growth more than the government expects, and have reduced our growth forecast to 3.0% for FY25, from 3.5%, despite some improvements in short-term indicators of economic activity.