NEW YORK: Global ratings agency Fitch has said Pakistan’s fiscal targets presented in the FY2020-21 budget will be challenging to meet amid the economic and health crisis associated with the coronavirus pandemic.
Fitch had affirmed Pakistan’s rating at ‘B-’ with a stable outlook in January. The agency said public finances were a key credit weakness even before the health crisis but support from the IMF and other creditors should help finance the budget and contain risks associated with the fragile external position.
The government has estimated that Pakistan’s fiscal deficit will reach 9.1% of GDP in the fiscal year ending June 2020 (FY20) against the original budget proposal of 7.1%.
Fitch said revenues fell short of target due to the economic fallout from the pandemic and termed the budget goal for this fiscal year as “overly ambitious”.
Current expenditures were boosted by the Rs1.2 trillion (2.9% of GDP) support package in March to boost health spending and provide assistance to low-income households.
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The new budget forecasts a decline in the fiscal deficit to 7.0% of GDP in FY21. This assumes tax revenue will increase by 28% from the estimate for FY20. Fitch said this will prove challenging in the absence of new tax measures, especially if economic growth remains sluggish.
Fitch forecasts fiscal deficits of 9.5% of GDP in FY20 and 8.2% in FY21, pushing the public debt-to-GDP ratio up to 89% of GDP.
This would be above the median level of 66% among Pakistan’s rating peers in that year. Fitch expect that the ratio will begin to fall after FY21, but this remains on the government’s ability to make progress in fiscal consolidation and on GDP growth rates.
Fitch said the government’s limited fiscal headroom within its rating category will constrain its ability to provide a more robust fiscal response to the coronavirus.
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The country’s rating also reflects a fragile external position given the sovereign’s high external debt repayments. Liquid foreign exchange reserves remain low at around $10.1 billion.
Moreover, lower oil prices are expected to offset the decline in remittances, which will keep the current account deficit stable at around 2% of GDP through FY21.
External liquidity will be supported by the G20 Debt Service Suspension Initiative which the government estimates will delay servicing payments in 2020 of around $1.8 billion.
The initiative involves bilateral creditors at present and the government has indicated that it has no plans to seek private-sector debt service suspension.