London June 18 2024: Pakistan’s ambitious FY25 budget strengthens prospects for an IMF deal, Fitch Ratings says. 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.
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%).
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 Mr. Sharif’s PMLN party. 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. 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.
Nevertheless, the FY24 primary deficit is in line with the target, and the authorities have undertaken unpopular subsidy reforms over the past year, supporting fiscal credibility. While Pakistan has a poor record of sustaining reforms over time, the absence of viable alternatives has strengthened support for tough policy decisions, at least in the near term. Pakistan completed its nine-month IMF Stand-By Arrangement in April, and in May the IMF reported “significant progress” toward agreeing a new Extended Fund Facility (EFF).
