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Mini-budget to support exports but expand budget deficit: Moody’s

January 31, 2019
Mini-budget to support exports but expand budget deficit: Moody’s

It says the mini-budget focuses mainly on revenue-based measures

The measures announced by the government in its mini-budget on January 23 will help reduce trade loss by supporting the country’s exports, but they will end up increasing the government’s budget deficit for much longer, Moody’s investors’ service said on Thursday.

The sovereign ratings agency says the mini-budget will support Pakistan’s manufacturing sector, and help narrow the current-account deficit, but it largely focuses on revenue-based measures. If the government didn’t increase its revenue or cut spending further, the same measures will increase its budget deficit.

Since day one, the PTI government is facing a double challenge. On the external front, it faces a large trade loss as for every dollar that comes to the country, two leave it, creating a balance of payment crisis. On the local front, the government spends much more than it earns, which leads to a big fiscal deficit. The latest budget may be helpful address the external challenge but it will worsen the local problem: the budget deficit.

“While the mini-budget will support the export sector, there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of further revenue-raising measures,” Moody’s said in its report.

Related: Mini-budget: Govt makes high-end mobiles more expensive, allows non-filers to buy 1300cc cars

The government presented limited revenue-raising measures in the mini budget, taxes on large vehicles and high-end mobile phones to be precise. As a result, the report says the mini-budget places greater weight on improvements in tax administration and spending restraint for the government to meet its deficit target: keeping the deficit at 5.1% of its GDP.

“We expect the deficit to widen to 6% of the GDP in the 2019 fiscal year 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 the GDP by 2021 as the economy picks up,” the credit ratings agency said. A wider deficit could raise questions over the credibility of the government’s fiscal policy, it added.

Moody’s also said the current account deficit will narrow down because of recent measures, but it will still remain sizable. This means Pakistan will continue to seek external financing. Although the government has secured $12 billion in financing from Saudi Arabia and the UAE, it only takes care of its needs up to June and there will be a financing gap beyond that because of a the sizable current account deficit.

Related: Karachi traders are all praises for the mini-budget

Pakistan is in talks with the International Monetary Fund for another loan as well as technical support and assistance on macroeconomic rebalancing and structural reform policies. The country is also in discussions with other countries and multilateral lenders such as China, Qatar, the Asian Development Bank, the World Bank and the Islamic Development Bank over external funding support to shore up its external position. Presently it has $8.8 billion in its reserves, which covers it for only two months of import payments against the recommended threshold of three months.

 
 
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