Moody’s Affirms Positive Growth Outlook for Pakistan

Pakistan’s GDP growth is expected to be closer to 5 percent in both fiscal year 2017 and 2018, while the fiscal deficit will be wider than expected, according to a recent report by Moody’s Investors Service.

The credit rating agency, in its report on Pakistan, stated that the budget is based on a real GDP growth target of 6 percent for fiscal year 2018, after 5.3 percent in fiscal year 2017 – which was revised down from 5.7 percent – driven by a significant increase in development spending related to the China-Pakistan Economic Corridor (CPEC) project, primarily for energy and transportation infrastructure.


“We expect real GDP growth to be closer to 5 percent in both fiscal year 2017 and fiscal year 2018, due primarily to CPEC project implementation risks and capacity constraints on government development spending” – Moody’s

Moody goes on to state that:

“Besides somewhat lower GDP growth than assumed in the budget, it is expected that the fiscal deficit will be wider than the government forecasts, at about 4.7 percent of GDP in fiscal year 2017 and 5 percent of GDP in fiscal year 2018. In particular, we expect further revenue collection shortfalls and pressure to increase current spending before the 2018 general election.

Pakistan government’s (B3 stable) re-assertion of its commitment to moderate deficits when it released its fiscal year 2018 budget is credit positive for the sovereign, but the level of execution risk for the budget is high.”


In his budget speech on 26 May, Finance Minister Ishaq Dar announced a fiscal deficit target of 4.1 percent of GDP for fiscal year 2018, similar to the 4.2 percent provisional estimate for fiscal year 2017, and much lower than a peak of more than 8.1 percent of GDP in fiscal year 2013.

Commitment to moderate deficits is credit positive for Pakistan whose debt burden, at nearly 67 percent of GDP in 2016, and large gross borrowing requirements, at nearly 32 percent of GDP, serve as constraints on its sovereign rating.

Implementation of the budget measures — as stated in the federal budget for the fiscal year ending June 2018 — would support Pakistan ’s credit profile by helping to relieve supply-side infrastructure bottlenecks, which constrain the country’s economic development.

However, budget execution risk is high, given ambitious GDP growth and revenue assumptions, as well as limited institutional capacity to spend development funds.

On the revenue side, the government projects an approximate 11 percent increase in fiscal year 2018 over fiscal year 2017 (a 3 percent increase over fiscal year 2017 budgeted revenues). The increase will stem from tax revenues, which are projected to grow by about 14 percent from estimated fiscal year 2017 collections and 9.5 percent over the fiscal year 2017 budgeted amount. At this stage, no material details are available to account for relatively high revenue growth.

“Given our forecast of about 10% nominal GDP growth in fiscal year 2018, this implies a tax buoyancy of around 1.4, which would indicate a high degree of tax revenue responsiveness to movements in GDP. The government’s nominal GDP growth assumptions are likely higher, implying more moderate tax buoyancy, broadly in line with international experience”

Realization of the revenue targets will be challenging. Factors that will weigh on revenue collection include a cut to the corporate tax rate to 30% from 31%, as part of a phased reduction, and duty breaks for selected export-oriented sectors, as announced in January 2017.

The report further states that the government projects about a 2% increase in current expenditure and a 40 percent increase in development spending relative to downwardly revised estimates for fiscal year 2017.

In his budget speech, Finance Minister Dar emphasized the government’s intent to keep current expenditures under tight control. Higher spending on infrastructure, education, health services and Kashmir affairs is driving the rise in development spending.

In years past, limited capacity to spend budgeted development funds restricted such expenditure, particularly at the provincial level.

“We believe it will be difficult for the government to fully realize its ambitious development spending targets this year, absent material institutional strengthening. Meanwhile, much of the CPEC project runs through difficult terrain along the Afghanistan border, which is vulnerable to periodic terrorist attacks that can disrupt construction” the report concludes.

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