The International Monetary Fund (IMF) staff-level agreement with Pakistan is credit positive for the country because it paves the way for the release of $1.2 billion in IMF financing at a time when its foreign exchange reserves are under significant pressure, says Moody’s Investors Services (Moody’s).
On 14 July, IMF staff and Pakistani authorities reached a staff-level agreement on policies to complete the combined seventh and eighth reviews of Pakistan’s (B3 negative) Extended Fund Facility (EFF). The agreement is credit positive for Pakistan because it paves the way for the release of $1.2 billion in IMF financing at a time when its foreign exchange reserves are under significant pressure.
Moody’s stated that completing the reviews is also likely to unlock additional funding from other multilateral and bilateral partners. In addition, the IMF Executive Board will consider extending the program until the end of June 2023 and increasing its size by $1 billion to $7 billion to support Pakistan’s program implementation and meet its higher financing needs in fiscal 2023 (ending in June 2023), as well as support its ability to attract additional financing from other external sources.
The current account deficit has widened since mid-2021 on higher food and oil prices and stronger demand for imports; combined with domestic political uncertainty, this has driven a sharp depreciation in the Pakistani rupee, further pushing up import costs. “However, we expect the deficit to narrow to 3.5 percent-4 percent of GDP in fiscal 2023 from 4.5 percent-5 percent in fiscal 2022 as imports moderate amid slowing growth and measures to curb nonessential imports”, it added.
The credit rating agency further stated that Pakistan’s financing needs will remain high in fiscal 2023 amid continued high global commodity prices and the need to repay external debt. Foreign exchange reserves declined to $8.9 billion in May, according to IMF data, sufficient to cover less than two months of imports, though we expect them to increase slightly in June on the back of a $2.3 billion loan from Chinese state banks.
“We expect the IMF Executive Board to approve the $1.2 billion disbursement in the third quarter of this year. We also expect Pakistan to maintain its engagement with the IMF, which would catalyze financing from other external sources as it focuses on policy priorities that the IMF has identified, including implementing the fiscal 2023 budget, making progress on power sector reforms, lowering inflation, reducing poverty, enhancing governance and mitigating corruption. In this scenario, we expect Pakistan to be able to meet its external financing needs for the next few years”, said the rating agency.
Moody’s further said that nonetheless, Pakistan’s ability to complete the current EFF program and maintain a credible policy path that supports further financing remains highly uncertain, while elevated inflation and a higher cost of living are adding to social and political risks.
The government may also find it difficult to continually enact revenue-raising reforms, such as steadily increasing petroleum levies and raising power tariffs, particularly in the run-up to the next general elections scheduled for mid-2023, it added.
