KARACHI: Pakistan’s “ambitious” FY25 federal budget strengthens its prospects of securing a financial bailout package from the International Monetary Fund (IMF), American credit rating agency Fitch said on Tuesday, noting that it would narrow the country’s fiscal deficit but will cost its growth. 

Pakistan unveiled the much-awaited Rs18.877 trillion ($67.76 billion) federal budget for the fiscal year 2024-25 last Wednesday. The tax-heavy budget is expected to play a pivotal role in Islamabad’s negotiations with the IMF as the South Asian country desperately tries to avert a macroeconomic crisis. 

While inflation has dropped down to a 30-month low of 11.8 percent, Pakistan still needs the IMF’s financial assistance package to shore its foreign reserves and stabilize its weak currency. 

“Pakistan’s ambitious FY25 budget strengthens prospects for an IMF deal,” Fitch said in a press release. “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.”

Fitch said narrowing the fiscal deficit would reduce external pressures on Pakistan, though at a cost to the country’s growth. The rating agency said that as per its forecast, based on partial implementation of the budget, Pakistan will project a primary surplus of 0.8 percent, 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 percent for FY25, from 3.5 percent, despite some improvements in short-term indicators of economic activity,” Fitch said. 

The American rating agency noted that Pakistan’s government debt looks set to decline to 68 percent of GDP by FYE24 due to high inflation and deflator effects, offsetting soaring domestic interest costs.

Fitch said it expects inflation and interest costs to decline, with economic growth and primary surpluses driving government debt/GDP gradually lower. 

It noted that Pakistan’s central bank cut policy rates for the first time in five years on June 10 by 150 points to 20.5 percent.

“We now forecast FY25 inflation at 12 percent, and the FYE25 policy rate at 16 percent,” it added. 

Fitch described external liquidity and funding as still Pakistan’s key credit challenges, despite stable debt dynamics. It said that while Pakistan may secure a new IMF deal, sustaining the tight policy settings necessary to keep external financing needs in check and to maintain compliance with a new EFF could become “increasingly challenging.”

Fitch noted that Pakistan’s external position has improved since February, adding that exchange rate reforms have attracted remittance inflows back to the official banking system while “strong” agricultural exports have also helped. 

“However, Pakistan’s projected funding needs still exceed reserves, at about USD20 billion per year in FY24–FY25, including maturing bilateral debt that we expect will continue to be rolled over,” the rating agency said. 

“This leaves Pakistan exposed to external funding conditions and policy missteps. Pakistan’s ‘CCC’ rating, affirmed in December 2023, reflects high external funding risks amid high medium-term financing requirements.”