Moody’s Investors Service in a report published on Thursday said the mini-budget will help narrow the current account deficit.
The sovereign ratings agency says the mini-budget will support Pakistan’s manufacturing sector, and help narrow the current-account deficit, but it largely focuses on revenue-based measures. If the government didn’t increase its revenue or cut spending further, the same measures will increase its budget deficit.
“While the mini-budget will support the export sector, there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of further revenue-raising measures,” Moody’s said in its report.
The government presented limited revenue-raising measures in the mini budget, taxes on large vehicles and high-end mobile phones to be precise. As a result, the report says the mini-budget places greater weight on improvements in tax administration and spending restraint for the government to meet its deficit target: keeping the deficit at 5.1% of its GDP.
“We expect the deficit to widen to 6% of the GDP in the 2019 fiscal year because revenue growth is likely to be below government projections, given slower economic growth and the new revenue-based incentives, before gradually narrowing to 5% of the GDP by 2021 as the economy picks up,” the credit ratings agency said. A wider deficit could raise questions over the credibility of the government’s fiscal policy, it added.
Moody’s also said the current account deficit will narrow down because of recent measures, but it will still remain sizable. This means Pakistan will continue to seek external financing. Although the government has secured $12 billion in financing from Saudi Arabia and the UAE, it only takes care of its needs up to June and there will be a financing gap beyond that because of a the sizable current account deficit.
According to the rating agency, the mini-budget announced on January 23 “places greater weight on improvements in tax administration”.
Also, if successful, the measures will assist the country’s manufacturing sector, promote exports and import substitution and help narrow the current account deficit.
“The current account deficit will narrow to 4.7% of GDP in fiscal year 2019,” the report predicted.
However, the ratings agency said the budget deficit will likely remain large as the government has ignored new spending cuts or revenue-raising measures. The large budget deficit will likely undermine the credibility of government efforts to achieve fiscal consolidation, it noted.
Stating that it will be difficult for the government to meet its deficit target of 5.1% of GDP, Moody’s predicted that the deficit will widen to 6% of GDP in fiscal year 2019 as revenue growth will possibly be below government projections.
The ratings agency projected that the current account deficit will narrow to 4.7% of GDP in FY19 and 4.2% in FY20 compared to 6.1% in FY18, however, it will remain sizable and wider than it was in 2013-16 driving the country’s external financing requirements.
Moody’s noted that Pakistan is in negotiations with the International Monetary Fund (IMF) over a new programme which would provide a stable additional source of external funding besides technical support and assistance on macroeconomic rebalancing and structural reform policies.
