ISLAMABAD: On 16 April, the International Monetary Fund (IMF) approved disbursement of $1.4 billion (0.5% of GDP) to Pakistan (B3 stable) under Rapid Financing Instrument (RFI). The financing supplements assistance of $588 million (0.2% of GDP) committed by the Asian Development Bank (Aaa stable) and the International Development Association (IDA, Aaa stable) to support Pakistan’s response to the coronavirus outbreak. Additionally, G20 creditors offered Pakistan bilateral debt relief.
The substantial financial support from official-sector creditors reduces Pakistan’s financing risks. We expect that Pakistan’s financing needs will rise because of coronavirus-related economic effects and the government’s PKR1.2 trillion ($7 billion, 2.7% of GDP) stimulus package, approved on 30 March.
The stimulus provides tax concessions for households and businesses, including the export and healthcare sectors, and direct cash handouts to support socially vulnerable and low-income earners laid off because of the coronavirus outbreak. Consequently, we expect the stimulus to widen the government deficit to 9.5%-10% of GDP in fiscal 2020 (ending June 2020) from 8.9% in fiscal 2019 despite strong revenue growth narrowing the deficit in the first half of fiscal 2020. Government revenue in the first half of this year rose almost 40% from a year earlier, with tax revenue up by 18% and nontax revenue more than doubling in part because of higher profits from the central bank.
Nevertheless, tax revenue is likely to contract in the second half compared with the year-ago period, although higher-than-budgeted central bank profits, lower-than-budgeted interest payments and fiscal savings from lower oil prices will mitigate the effect of the contraction on the deficit.
We expect that general government debt will rise to around 87% of GDP by June 2020 from around 83% in June 2019 and gradually decline in subsequent years. In fiscal 2021, we expect the deficit to narrow given the government’s commitment to fiscal consolidation under its IMF programme, but remain wide at 8%-8.5% of GDP.
The multilateral development banks’ (MDBs) latest financial assistance augments their current funding to Pakistan in programmes including the IMF’s Extended Fund Facility and the World Bank’s revitalising, Innovating, Strengthening Education project.
We expect the extra funding to cover the government’s additional external financing needs in fiscal 2020.
The G20’s recent offer of debt relief to low-income countries will also support Pakistan by deferring principal and interest payments on bilateral debt due between May and December. The deferrals may be extended and involve other creditors. Debt relief by official-sector creditors would provide additional but very modest spending capacity for Pakistan, whose interest payments on foreign-currency debt are around 0.6% of GDP for fiscal 2021, with about one-third owed to bilateral creditors and another one-third owed to MDBs.
Although official-sector debt relief would provide some additional fiscal capacity, the G20 has also called on private-sector creditors to offer comparable relief on a voluntary basis.
Missed or delayed payments of contractually obligated interest or principal owed to private-sector creditors constitute a default under our definition.
We expect Pakistan’s real GDP to contract modestly by 0.1%-0.5% in fiscal 2020 (the country’s first annual recession, according to our records), with the economy gradually recovering to grow by more than 2% in fiscal 2021 (see Exhibit 2). Although the country’s export sector accounts for just 9% of GDP and tourism accounts for just 2% of GDP, the nationwide lockdown from 1 April to month-end (with a possible extension) to curb the coronavirus will significantly curtail domestic consumption and pose downside risks to economic growth, which threatens a wider fiscal deficit and a higher government debt burden than we currently project.