Pakistan’s fiscal deficit to widen in FY21: Fitch

KARACHI: Economic shock and health crisis associated with Covid-19 will challenge Pakistan’s ability to narrow the fiscal deficit to seven per cent in the FY21, said Fitch Ratings on Friday.

“Fitch forecasts are more conservative than the government’s. We expect deficits of 9.5pc of GDP in FY20 and 8.2pc in FY21, pushing the public debt-to-GDP ratio up to 89pc of the GDP.”

The rating agency’s commentary comes a week after the government announced the FY21 budget in which it projected a 28pc increase in tax revenues and expects to collect Rs4.963 trillion.

The agency said it is skeptical of the government’s ability to meet these targets due to the prevalent economic slowdown and absence of new taxes in the budget. It said the targets will be challenging to achieve as the centre plans to boost healthcare spending and support low-income households through the Ehsaas Programme.

“The new budget forecasts a decline in the fiscal deficit to 7pc of GDP in FY21. However, this assumes tax revenue will increase by 28pc from the estimate for FY20, and will prove challenging in the absence of new tax measures, especially if economic growth remains sluggish,” it said.

Criticising the revenue target set for the last fiscal year, Fitch said the government’s collection in FY21 has been much lower than the projected levels. “Revenues fell short of [FY20] target , due both to the economic fallout from the pandemic and the fact that the budget goal was overly ambitious, in our view.”

The government in March also announced a Rs1.24 trillion stimulus package to boost health spending and provide assistance to households affected by the lockdowns.

However, this increase in current expenditure widened the fiscal deficit to 9.1pc against the target of 7.1pc.

On the external front, Fitch Ratings said the country’s fragile situation is due to the high debt repayments but the increase in import cover to 3.6 months and falling oil prices will keep the current account deficit stable at around 2pc of the GDP in FY21.

Moreover, the G-20 Debt Service Suspension Initiative will help support external liquidity by delaying debt servicing payments worth $1.8 billion in 2020. In addition, the International Monetary Fund is likely to be flexible in its targets under the $6bn Extended Fund Facility given the magnitude of pandemic.