Pakistan’s tax collection target difficult to meet: Fitch

External position fragile due to low dollar reserves
Jun 19, 2020
Photo: AFP
Photo: AFP

Pakistan’s fiscal consolidation targets presented in its FY21 budget on June 12 will be difficult to meet amid the economic shock and health crisis because of the coronavirus pandemic, Fitch Ratings said in a report on Thursday.

One of the three major global rating agencies, Fitch, stated that public finances are a key credit weakness. They noted it even before the health crisis occurred, they affirmed Pakistan’s rating at ‘B-’ with a Stable Outlook in January 2020.

The new budget forecasts a decline in the fiscal deficit to 7.0% of GDP in FY21. However, this assumes tax revenue will increase by 28% from the estimate for FY20 and will prove to be challenging in the absence of new tax measures, especially if the economic growth remains slow.

Fitch forecasts deficits of 9.5% of GDP in FY20 and 8.2% in FY21, pushing the public debt-to-GDP ratio up to 89% of GDP.

The agency projects that the ratio will begin to fall after FY21, but this depends on the government’s ability to make progress in fiscal consolidation and on GDP growth rates.

However, the government’s limited fiscal headroom within its rating category will constrain its ability to provide a more robust fiscal response to the coronavirus as the number of cases continues to rise rapidly in the country.

According to the agency, the country’s rating also reflects a fragile external position given the high external debt repayments. Liquid foreign exchange reserves remain low at around $10.1 billion but import compression has increased reserve import cover to about 3.6 months. Moreover, lower oil prices are expected to offset the decline in remittances, which will keep the current account deficit stable at around 2% of GDP through FY21.

External liquidity will be supported by the country’s participation in the G-20’s Debt Service Suspension Initiative, which the government estimates will delay servicing payments of around $1.8 billion in 2020.

Pakistan also received $1.4 billion of emergency support from the IMF under the Rapid Financing Instrument in April, in addition to its existing $6 billion Extended Fund Facility (EFF).

The agency expects the release of accumulated tranches from the EFF over the coming months.



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