The International Monetary Fund’s (IMF) approval of a $1.1 billion disbursement and loan programme enhancement, is a credit positive for Pakistan, but risks remain, says Moody’s Investors Services (Moody’s).
The rating agency in its latest report on Pakistan noted that on 29 August, the IMF’s executive board completed the combined seventh and eighth reviews of Pakistan’s (B3 negative) Extended Fund Facility (EFF) and announced an extension and increase in its loan programme for Pakistan, a credit positive.
The IMF financing and the additional support from bilateral partners that it will catalyse will ease pressure on Pakistan’s dwindling foreign exchange reserves, which currently cover less than two months of imports.
The EFF review completion allows the immediate disbursement of $1.1 billion to Pakistan, bringing total disbursements to $3.9 billion since the programme’s inception in 2019. The board has also extended the programme until 30 June 2023 and increased its size by $500 million to $6.5 billion to support Pakistan’s programme implementation and to meet its higher financing needs in fiscal 2023 (ending June 2023).
Some countries have also planned additional financial support for Pakistan. Saudi Arabia (A1 stable) pledged to roll over a $3 billion loan and provide $1 billion worth of oil on a deferred payment basis, while Qatar (Aa3 stable) plans to invest $3 billion in Pakistan, and the UAE (Aa2 stable) $1 billion. Saudi Arabia is also in discussions with the IMF on Pakistan’s potential to tap the kingdom’s Special Drawing Rights quota, which could amount to an additional $2.8 billion in financing.
“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,” the agency said.
Moody’s 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. In turn, this would also catalyse additional financing from other bilateral and multilateral partners, said the rating agency.
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.
“Political risk in Pakistan remains high, which will challenge the stability and predictability of policymaking. Ousted former Prime Minister Imran Khan has rallied his base to protest and push for early elections, ratcheting up political tensions in recent months,” the agency surmised.
More recently, Khan was charged with terrorism-related offences. We expect political volatility to remain high as Pakistan prepares for its next elections, which must be held by the second half of next year, Moody’s added.
The rating agency further stated that social risks are also heightened. Headline inflation came in at 24.9 percent year-on-year in July. 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 pressure 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.
