Moody’s Investor Service, in its latest statement, noted that the No-Confidence Motion could adversely affect Pakistan’s credit rating, terming the situation as a credit negative.
The no-confidence motion in Pakistan 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 program from this point on is uncertain, and its participants could be in doubt, says Moody’s latest statement on the country’s current situation.
The statement further notes that the motion comes when Pakistan is burdened 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 erosion of foreign-exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks. 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 statement notes.
Moody’s also expressed concerns that 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 percent of total imports, the statement details.
Pakistan’s current account deficit amounted to more than $12 billion between July 2021 and February 2022, a stark contrast to a $1 billion surplus in the same period a year earlier.
“We now expect the deficit to widen to 5-6 percent of GDP in fiscal 2022 (ending June 2022) compared with our previous forecast of 4 percent. This further widening will put greater pressure on Pakistan’s foreign reserves, which declined to $14.9 billion as of February 2022 from $18.9 billion in July 2021, according to IMF data, sufficient to cover only around two months of imports,” the statement said.
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. However, 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 program from this point on is uncertain, and its participants could be in doubt.
Pakistan is undergoing its seventh review under the IMF’s Extended Fund Facility program, which has disbursed $3 billion out of the stipulated $6 billion to date. However, discussions between Pakistan and the IMF appear to have stalled since early March, with the IMF expressing concerns over the government’s recent relief package in response to rising inflation. Relief measures have included subsidies on fuel and electricity prices, as well as a tax amnesty for specified sectors.
Moody’s has expressed concerns that 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.
No-Confidence Motion:
On 28 March, the opposition parties in Pakistan tabled a no-confidence motion in the National Assembly, citing the mismanagement of the economy, and claimed that the ruling party no longer has a parliamentary majority.
Voting is likely to take place on 4 April. Pakistan Tehreek-e-Insaf officially controls 155 seats out of 342 in the National Assembly (lower house of parliament) and has a majority of 179 with their allies included. However, the recent defections of the allies have cast a serious doubt over the ruling party’s majority
