Moody's says economy will contract 0.5%, slip into recession
The Prime Minister’s relief package will widen the government’s deficit up to 10% of its GDP in the fiscal year ending June 30, 2020, Moody’s Investors Service said in a report on Wednesday.
The sovereign ratings agency expects the country’s economy to contract by 0.5%, (IMF’s forecast was 1.5%) this fiscal year as the country heads into its first annual recession as per Moody’s records.
The government has announced a Rs1.2 trillion stimulus to fight the coronavirus pandemic, which has crippled the economy. The country has to impose a national lock down, bringing an already debt-ridden economy to a complete halt. This has lowered the government’s revenues and increased costs at the same time.
Pakistan’s financing needs will increase as it provides relief to businesses and individuals in the country’s fight against Covid-19 and its economic impact. The relief would mean concessions for households and businesses, including the healthcare sector and exporters. In doing so, the government will lose revenue. A 31% drop in petrol consumption, one of the major tax collection sources, since the lockdown is one example of that.
Moody’s expects tax revenue to contract in the second half of fiscal year 2020. The deficit, the gap between the government’s revenue and expenses where the latter is higher, will increase up to 10%, up from the previous year’s 8.9%.
The New York-based credit ratings agency also said Pakistan’s government debt would rise to around 87% of GDP by June 2020 compared to 83% as of June 2019. However, it added the debt will gradually decline in the next fiscal year as the debt relief offered by the Group of 20 will support Pakistan by deferring interest payments along with principal amounts till December and could extend it further.
An extended lockdown will significantly curtain domestic consumption, which poses risks to economic growth and may widen the fiscal deficit. It said the deficit will narrow to 8% to 8.5% in the next fiscal year and economy will recover gradually and grow at 2%.
Currently, we projected a higher government debt burden, said Moody’s, one of the global agencies that assess country credit risks, which is then used by international investors willing to buy sovereign bonds. The higher the ratings, the lower the default risk, which helps countries negotiate financing at cheaper rates.