Global rating agency Moody’s in a report released on Thursday stated that ‘Economic Reform Package’ of Pakistan will supports manufacturing sector and exports.
However, it will enhance the challenges of fiscal consolidation for the government, the report said.
Moody’s report said that the fresh budget measures would support manufacturing sector, fostering exports and import substitution, help narrow current account deficit.
Finance Minister Asad Umar, on January 23, announced the government’s second mini-budget, which largely focuses on revenue-based measures to improve supply-side conditions for businesses and incentivise domestic reinvestment.
The report said in the absence of new spending cuts or revenue-raising measures, however, these measures will keep Pakistan’s budget deficits wider for longer, potentially eroding the credibility of government efforts to achieve fiscal consolidation.
The government’s this mini-budget aims to improve business conditions, including for manufacturers and exporters, by removing or reducing existing taxes that erode profit margins or disincentivise reinvestment.
Specific measures include reductions in import custom duties on essential raw materials and machinery, the abolition of tax on retained earnings, and incentives for the agriculture sector, which accounts for around 20% of the country’s exports.
The government presented limited revenue-raising measures, primarily taxes on large vehicles and high-end mobile phones.
The mini-budget places greater weight on improvements in tax administration and spending restraint for the government to meet its deficit target of 5.1% of GDP.
The report said the deficit to expected to widen to 6% of GDP in fiscal 2019 because revenue growth is likely to be below government projections, given slower economic growth and the new revenue based incentives, before gradually narrowing to 5% of GDP by fiscal 2021 as the economy picks up.
This mini-budget comes against a backdrop of low export growth in the first six months of fiscal 2019, despite the Pakistani rupee’s 25% decline against the US dollar since December 2017, the report said.
The report said weak exports aside, Pakistan’s current-account dynamics have been largely positive in recent months.
Remittances rose by 10% year on year in US dollar terms in the first half of fiscal 2019, while goods imports slowed sharply to around 3% year on year as non-fuel goods imports contracted.
The government has secured $12 billion in financing from Saudi Arabia and the United Arab Emirates, amounting to $6 billion and divided equally between deposits and deferred oil payments – which is likely to largely cover the country’s net financing needs for fiscal 2019, the report said.
However, a net financing gap beyond fiscal 2019 remains because of the still sizable current-account deficit.
Pakistan remains in negotiations with the International Monetary Fund (IMF) over a new programme that would provide a stable additional source of external financing.
The country is also in discussions with other countries and multilateral lenders such as China, Qatar, the Asian Development Bank, the IBRD and the Islamic Development Bank over external funding support to shore up its external position.