ISLAMABAD: Terming the revival of the International Monetary Fund (IMF) programme ‘credit positive’ to help shore up foreign exchange reserves, the Moody’s Investor Service wondered if the government would sustain reform momentum after September 2022 as it enters the election mode.

In a statement, the New York-based rating agency said the disbursement of $1bn by the IMF “will partially offset pressures on foreign exchange reserves, while facilitating further financing from other official sources”.

The rating agency said sustained progress on reforms areas — revenue, energy and state-owned enterprise sector — will not only raise economic productivity and competitiveness but also reduce contingent liability risks to the sovereign. “We believe Pakistan remains committed to advance other reforms under the IMF programme, likely unlocking further disbursements,” Moody’s said.

“However, beyond the expiry of the programme in September 2022, the government’s ability to sustain reform momentum, particularly reforms aimed at further broadening its revenue base, or to commit to an immediate successor programme is uncertain given elections are scheduled to take place by late 2023,” it added.

Believes Pakistan remains committed to advancing other reforms under IMF programme

The statement said the fund disbursement was “credit positive, shoring up Pakistan’s foreign exchange reserves, which have faced significant pressures in recent months amid a sharp widening in the current account deficit as higher global oil and commodity prices contributed to a yawning goods trade deficit.

Under the programme, the Pakistani government has committed to several structural reforms aimed at placing the economy on a path of sustainable and balanced growth. Progress in its reform agenda has previously helped Pakistan successfully unlock $2bn in disbursements from the IMF programme.

Moody’s said that from July to December, the current account deficit was a cumulative $9bn compared with a surplus of $1.2bn during the same period a year earlier. The rapid widening in the current account deficit led to a drawdown in foreign exchange reserves, which declined to $14.4bn in November from $18.9bn in July, according to IMF data.

The injection of $3bn financing from Saudi Arabia to Pakistan in December boosted the latter’s foreign reserves to $16bn in that month. “We project the current account deficit will widen to 3pc-3.5pc of GDP in fiscal year 2022,” it said and expected a moderation in global oil and commodity prices thereafter to contain growth in the import bill, while the ongoing global economic recovery supports exports and remittance inflows.

As a result, Moody’s assumed that the current account deficit will narrow and stabilise at 2pc-3pc of GDP through the subsequent two to three years.

Beyond reserves, the completion of the IMF’s review and successful disbursement reflect recent gains and prospective improvements in Pakistan’s institutions and governance strength.

Under the review, the IMF acknowledged the greater credibility of Pakistan’s macroeconomic and fiscal management. More orthodox monetary policy has complemented the country’s recent efforts to shore up fiscal finances, including several amendments to the existing tax regime under the Finance (Supplementary) Bill 2021.

The strengthening of central bank autonomy through the State Bank of Pakistan Amendment Bill 2021 will add credibility to the central bank’s ability to target inflation and restrain direct financing of government debt.

Further traction on tax reforms will likely drive a gradual increase in revenue with a concomitant improvement in debt affordability. Nevertheless, the IMF also noted the need for further structural reforms, particularly in the energy and state-owned enterprise sectors, to foster a business environment conducive to investments and private sector development.

Published in Dawn, February 5th, 2022