Moody’s warns of Pakistan’s debt sustainability risks due to poor affordability

Global rating agency Moody’s has expressed concerns about Pakistan’s debt sustainability, highlighting that the country’s weak debt affordability presents significant risks. The analysis followed the announcement of Pakistan’s finance bill for the fiscal year 2024-2025.

Debt Affordability and Interest Payments:

• Pakistan spends more than half of its revenue on interest payments, indicating very weak debt affordability.
• The budget estimates that debt servicing payments will increase by about 18% for fiscal 2025 compared to the previous year.
• Approximately 55% of the fiscal year 2025 revenue (Rs9.8 trillion) is allocated for interest payments on government debt.

Expenditure and Subsidies:

• The increase in expenditure lacks significant cost-containment measures, leading to very high interest payments.
• Government subsidies have increased by 27% to Rs1.4 trillion, primarily driven by large increases in subsidies to the power sector. This reflects minimal progress in energy sector reforms.

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Fiscal Consolidation and Reform Implementation:

• The budget shows quicker fiscal consolidation, but the ability to sustain reforms is critical for easing liquidity risks.
• The finance bill is expected to support Pakistan’s negotiations with the IMF for a new Extended Fund Facility (EFF) programme, essential for unlocking financing from the IMF and other bilateral and multilateral partners.

Risks and Challenges:

• The government’s ability to sustain reform implementation will be key to meeting budget targets and securing external financing.
• Social tensions due to the high cost of living, exacerbated by higher taxes and potential future adjustments to energy tariffs, could hinder reform implementation.
• There are risks that the coalition government may not have a strong enough electoral mandate to consistently implement difficult reforms.

Moody’s emphasized that Pakistan’s fiscal strategies, particularly those aimed at addressing debt sustainability and reform implementation, are crucial for maintaining economic stability and securing necessary external financing.