Moody’s Warns of Fiscal Challenges and Social Tensions in Pakistan’s FY25 Budget

Moody’s warned that a resurgence of social tensions on the back of the high cost of living (which may increase because of higher taxes and future adjustments to energy tariffs) could weigh on reform implementation

Moody’s said the budget for FY25 outlines a quickening of fiscal consolidation to be achieved through increases in taxes and stronger projected nominal growth.

“The announced budget will likely support Pakistan’s ongoing negotiations with the IMF for a new EFF that will be crucial for the government to unlock financing from IMF and other bilateral and multilateral partners to meet its external financing needs,” said the global rating agency.

“However, it will be the government’s ability to sustain reform implementation that will be key to allowing Pakistan to meet its budget targets and continually unlock external financing to meet its needs, leading to a durable easing of liquidity risks.”

Moody’s warned that a resurgence of social tensions on the back of the high cost of living (which may increase because of higher taxes and future adjustments to energy tariffs) could weigh on reform implementation.

“Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain,” it said.

Moody’s said that the budget showed the government seeks to achieve quicker fiscal consolidation mainly through revenue increases, with few spending-containment measures.

“The government has set a challenging target to substantially increase federal government revenue to Rs17.8 trillion, about 46% higher from a year ago,” it noted.

Moody’s noted the increase in revenue is led by a 40% increase in tax revenue that the government seeks to achieve through a combination of new taxes (for example, higher taxes on cars, cement, steel, gas, and diesel) and stronger nominal growth.

“Overall, the government targets an increase in revenue/GDP to 14.3% in fiscal 2025 from 11.5% in fiscal 2024.”

“The increase in expenditure reflects lack of significant cost-containment measures and Pakistan’s very high-interest payments,” said Moody’s.

The agency stated that the budget allocated subsidies increased by 27% to Rs1.4 trillion, mainly driven by large increases in subsidies to the power sector, reflecting limited progress in energy sector reforms.

“Meanwhile, the government spends more than half its revenue on interest payments, indicating very weak debt affordability which drives high debt sustainability risks,” highlighted Moody’s.

“Pakistan’s very weak debt affordability drives high debt sustainability risks,” Moody’s noted.

“Having a significant share of its budget allocated towards debt payments will constrain the government’s capacity to service its debt while meeting essential social spending and infrastructure needs,” it said.