ISLAMABAD: Moody’s Investor Service on Thursday warned that a no-confidence motion against Prime Minister Imran Khan would increase policy uncertainty amid rising inflation, widening current account deficit and depleting foreign exchange reserves.

The New York-based credit rating agency termed the situation “a credit negative” given the associated gap in policy and decision making. “We view the no-confidence motion as credit negative because it raises significant uncertainty over policy continuity, as well as the government’s ability to continue to implement reforms to increase productivity growth and secure external financing, including from the International Monetary Fund (IMF).”

In a statement, Moody’s noted that the no-confidence motion had come at a time when Pakistan was encumbered with surging inflation and widening current account deficits amid rising global commodity prices. “A further deterioration in its external position, including a significant widening of the current account deficit and an erosion of foreign-exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks,” it observed.

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Pakistan has faced significant pressure on its foreign exchange reserves in recent months amid elevated global commodity prices and a recovery in domestic demand. The Russia-Ukraine military conflict, which has driven up global commodity prices, has amplified pressure on its external position. The country is a net oil importer, with petroleum and related products accounting for about 20 per cent of total imports.

Pakistan’s current account deficit amounted to more than $12 billion between July 2021 and February 2022 — a stark contrast to a $1bn surplus in the same period a year earlier. “We now expect the deficit to widen to 5-6pc of GDP in fiscal 2022 (ending June 2022) compared with our previous forecast of 4pc,” Moody’s said.

This further widening will put greater pressure on Pakistan’s foreign reserves, which declined to $14.9bn as of February 2022 from $18.9bn in July 2021, according to IMF data, sufficient to cover only around two months of imports.

“Securing external financing, including from the IMF, will be key for Pakistan to continue to meet its external obligations given the pressures on its foreign-exchange reserves,” the rating agency said.

However, it noted that the “no-confidence motion raises significant uncertainty over the government’s capacity to commit to implementing reforms, particularly those aimed at broadening the revenue base”. “How Pakistan will approach the IMF programme from this point on is uncertain, and its participation could be in doubt.”

Pakistan is undergoing its seventh review under the IMF’s Extended Fund Facility programme, which has disbursed $3bn, out of the stipulated $6bn, to date. However, discussions between Pakistan and the IMF appear to have stalled since early March, with the Fund expressing concerns over the government’s recent relief package in response to rising inflation. The relief measures included subsidies on fuel and electricity prices, as well as a tax amnesty for specified sectors.

According to Moody’s, regardless of the outcome of the no-confidence vote, the ruling party will find it difficult to balance advancing revenue-raising reforms to secure external financing and political pressure from voters facing rising living costs.

Published in Dawn, April 1st, 2022