ISLAMABAD: Moody’s Investor Service on Tuesday said the recently finalised economic bailout, once approved by the International Monetary Fund (IMF) board, would improve Pakistan’s external funding prospects, but warned that a weak coalition government, governance challenges, and elevated social tensions may pose significant threats to the successful implementation of the proposed reforms.

The IMF and Pakistani authorities reached a staff-level agreement on July 12 for a 37-month Extended Fund Facility Arrangement (EFF) of about $7 billion. The agreement is pending approval by the IMF Executive Board, with no scheduled date for the vote as yet.

“If approved, which we expect is likely, the new IMF programme will improve Pakistan’s (Caa3 stable) funding prospects,” said Moody’s, one of the top three global rating firms, in a brief note.

It said the programme will provide credible sources of financing from the IMF and catalyse funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs. “However, the government’s ability to sustain reform implementation will be key to allowing Pakistan to continually unlock financing over the duration of the IMF programme, leading to a durable easing of government liquidity risks,” it added.

Warns of risks to economic reforms due to weak coalition, governance challenges

Moody’s said Pakistan’s external position remained fragile, with high external financing requirements over the next three to five years. “The country is vulnerable to policy slippages,” it said, adding: “Weak governance and high social tensions can compound the government’s ability to advance reforms, jeopardising its ability to complete reviews under the IMF programme and unlock external financing.”

It noted that the new EFF came with conditions of far-reaching reforms, such as measures to broaden the tax base and removing exemptions and making timely adjustments of energy tariffs to restore the energy sector viability.

The IMF’s new facility — 24th for Pakistan — also mandates improving management and privatisation of state-owned enterprises, phasing out agricultural support prices and associated subsidies, advancing anti-corruption and governance reforms, promoting transparency, and gradually liberalising trade policy.

“A resurgence of social tensions on the back of high cost of living — which may increase because of higher taxes and future adjustments to energy tariffs — could weigh on reform implementation,” Moody’s said. Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain, it added.

The statement quoted an earlier IMF report of May this year that put Pakistan’s external financing needs at about $21bn for fiscal year 2024-25 and about $23bn for FY27. “Pakistan’s foreign exchange reserves of $9.4bn as of July 5, 2024 is well below its needs,” it said.

In the February 2024 review, Moody’s had kept unchanged Pakistan’s ratings at ‘Caa3’ with stable outlook, but highlighted significantly high risks of liquidity and external vulnerability challenges following “highly controversial elections” and severely constrained decision-making capacity of the coalition government.

The agency had downgraded the country’s rating to Caa3 from Caa1 in February 2023, owing to challenges with the IMF programme and resultant depletion of foreign exchange reserves. However, it did not upgrade rating despite subsequent approval and completion of a follow-up nine-month Standby Arrangement programme worth $3bn.

Published in Dawn, July 17th, 2024