Pakistans budget reforms are credit positive: Moody's

Deficits have averaged 5.1% of GDP during fiscal 2004-13, which is significantly higher than similarly rated peers

June 09, 2014 8:35 IST | India Infoline News Service
On Tuesday, Pakistan (Caa1 negative) announced its budget for the fiscal year ending 30 June 2015, which includes an ambitious array of policy measures that would bolster the country’s stabilizing macroeconomic environment and shore up government finances. These reforms are credit positive because they would support a gradual shift to a higher growth trajectory and, more immediately, strengthen Pakistan’s balance of payments through continued external funding.
Finance Minister Ishaq Dar’s second budget for fiscal 2015 addressed the issues required under the International Monetary Fund’s (IMF) Extended Fund Facility. It charts a path for fiscal consolidation, and includes a host of reforms aimed at widening the tax net, reducing power shortages and enhancing the role of the private sector. Achieving these targets would enable Pakistan to qualify for further IMF disbursements, helping it to refinance the $2.5 billion that it owes the lender this calendar year. Ultimately, the continuation of the IMF program would further focus the attention of policymakers on the economic and political benefits of sounder government finances.
Deficits have averaged 5.1% of GDP during fiscal 2004-13, which is significantly higher than similarly rated peers, and Pakistan’s shallow domestic market has made financing those deficits unsustainable. In fiscal 2015, the government seeks to reduce the budget deficit to 4.9% from 5.8% in fiscal 2014 and 8.2% in fiscal 2013 by increasing tax revenues and reducing expenditures. Meeting these targets will be a challenge because Pakistan is premising its goals on GDP growth hitting 5.1% (we forecast 4.5% GDP) and a fiscal surplus at the provincial level for fiscal 2015, versus a deficit in the current fiscal year.
The government projects budgetary borrowing from the banking system to fall to zero in fiscal 2015, in keeping with the quantitative criteria that Pakistan must meet under the IMF program. Instead, the government will rely more on external funding in fiscal 2015 than in the current fiscal year. The government also expects to raise PKR198 billion ($2 billion) from sales of government stakes in key public-sector entities.
The government’s forecasted fiscal 2014 and 2015 deficits are marginally higher than IMF program targets of 5.3% for fiscal 2014 and 4.2% for fiscal 2015, which include grants made to Pakistan. But the implementation of structural reforms outlined by the government would likely allow Pakistan to continue receiving disbursements. These reforms primarily focus on raising tax revenues through a phased reduction in exemptions and concessions, promoting the role of the private sector by reducing corporate taxes, carrying out a privatization program and taking steps to resolve Pakistan’s energy shortages.
Despite Pakistan’s weak performance record with IMF programs, its progress under the current plan has been on track so far: as of March 2014, it had met eight of 17 structural benchmarks. The IMF will decide at the end of this month whether Pakistan will qualify for the fourth tranche of financial assistance under the program. We expect Pakistani authorities to meet most remaining benchmarks related to tax and energy sector reform, although they may encounter political difficulties in pushing through with privatization plans.

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