IMF programme revival credit positive, but challenges remain, says Moody’s

Moody's Investors Service has termed the International Monetary Fund’s (IMF) recent approval of $1.1-billion loan disbursement and programme revival a ‘credit positive’ for Pakistan.

On 29 August, the IMF's executive board had completed the combined seventh and eighth reviews of Pakistan’s Extended Fund Facility (EFF) and announced an extension and increase in its loan programme for Pakistan.

IMF revives EFF amid nasty govt-PTI clatter

“The IMF financing and the additional support from bilateral partners will ease pressure on Pakistan’s dwindling foreign exchange reserves, which currently cover less than two months of imports,” said the IMF then.

The board’s decision allows for an immediate disbursement of SDR 894 million (about US$1.1 billion), bringing total purchases for budget support under the arrangement to about US$3.9 billion.

Following the programme revival, some countries have also planned additional financial support to Pakistan. Saudi Arabia pledged to roll over a $3 billion loan and provide $1 billion worth of oil on deferred payment basis, while Qatar plans to invest $3 billion in Pakistan, and the UAE $1 billion.

Pakistan’s ability to complete the current EFF programme and maintain a credible policy path that supports additional financing remains uncertain amid elevated political and social risks: Moody's

Moody's, in its report last week, said Pakistan will be able to fully meet its financing needs for fiscal year 2022-23.

“Based on our estimates, we expect Pakistan to require around $37-$38 billion of external financing for fiscal 2023, with $24 billion going toward external debt repayments and $13-$14 billion toward the current account deficit,” said Moody’s.

“Our baseline expectation is that Pakistan will be able to fully meet its financing needs for fiscal 2023 and the next few years, based on the assumption that Pakistan maintains engagement with the IMF over the remaining period of the EFF and steadfastly implements structural reforms to support sustainable growth,” it added.

The US-based credit rating agency was of the view that the programme would also catalyse additional financing from other bilateral and multilateral partners.

“Nonetheless, Pakistan’s ability to complete the current EFF programme and maintain a credible policy path that supports additional financing remains uncertain amid elevated political and social risks,” it said.

Moody’s said that political risk remains high, which will challenge the stability and predictability of policymaking.

“Social risks are also heightened,” said Moody’s as Pakistan battles rising inflation that hit a multi-decade high of 27.3% in August.

Moody’s noted that the ongoing floods would add to inflationary pressures in the country, while imports would also rise.

“Recent record rainfall that has left a third of the country flooded and caused a tragic loss of lives is likely to add to inflationary pressures. At the same time, import demand for food is likely to increase, adding pressures to the current account balance. Damage to crops and infrastructure threatens fiscal slippage and complicates Pakistan’s ability to enact tax reforms and tighten spending,” it said.