Pakistan's ability to secure loans remains ‘severely constrained’ until new IMF programme: Moody’s

Moody’s Investor Services said on Thursday that Pakistan’s ability to secure loans from bilateral and multilateral partners will “be severely constrained” until a new programme is agreed with the International Monetary Fund (IMF).

In an issuer comment, Moody’s said whether Pakistan will join another IMF programme may only become clear after elections, which are due by October 2023.

Finance Minister Ishaq Dar during a press conference last week already said it will be up to a new elected government to decide on entering another IMF programme.

“Negotiations for any future IMF programme would also take some time, even if they succeed. Until a new programme is agreed, Pakistan’s ability to secure loans from other bilateral and multilateral partners will be severely constrained,” Moody’s said.

Last week, Finance Minister Ishaq Dar said the government is looking at rescheduling bilateral debts, but it does not plan to approach the Paris Club or multilateral partners to reschedule their debt.

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However, State Bank of Pakistan (SBP) Governor Jameel Ahmed stated that there was no plan for Pakistan to enter any debt restructuring.

“Under our definition, a suspension of debt service obligations only to official creditors is unlikely to have direct rating implications. Indeed, such relief would increase the government’s available fiscal resources for essential health, social and infrastructure spending,” said Moody’s.

On the recently announced budget for fiscal year 2023-24, Moody’s said the budget lacked major revenue-raising or spending-containment measures to alleviate intense government liquidity pressures.

“We consider the deficit estimates and growth projections to be optimistic, given the stresses the economy is facing, in particular government liquidity and external vulnerability pressures, exacerbated by the severe floods of August 2022, that will continue to weigh on economic activity over fiscal 2024,” said Moody’s in its note.

Under the Budget 2023-24, the budget deficit was estimated at 6.5% of GDP, narrowing from an estimated deficit of 7.0% in fiscal 2023.

Meanwhile, the credit ratings agency noted that the budget, despite providing a wide range of relief measures for households and businesses, does not contain significant revenue raising or spending-containment measures.

“Pakistan’s low revenue/GDP (stable at around 12% from 2019-22) is a major constraint on the government’s debt affordability and debt burden,” said Moody’s.

The budget targets fiscal 2024 tax revenue at Rs9.2 trillion, up 28% from an estimated Rs7.2 trillion in fiscal 2023.

“Given a lack of new significant revenue-raising measures, the government’s revenue projections rely mainly on the assumption that nominal GDP growth will be high and support an increase in revenue. In the current context, we see significant downside risks to that assumption,” it said.

Moody’s said that Pakistan’s very weak debt affordability drives high debt sustainability risks. “About 60% of the fiscal 2024 budget (Rs11.7 trillion) goes towards servicing interest and principal payments on the government’s debt.

“Having a significant share of its budget going towards debt payments will constrain the government’s capacity to service its debt while meeting the population’s essential social spending and infrastructure needs,” it said.

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The agency pointed out that Pakistan’s government liquidity and external positions remain fragile.

“It added that Pakistan is unlikely to access market financing at affordable costs, either from eurobonds or commercial banks, in the foreseeable future.

“The country’s external debt repayment will remain high for the next few years, with about $25 billion of repayments (principal and interest) due in fiscal 2024,” said Moody’s.

The agency noted that Pakistan’s external funding prospects for fiscal 2024 and later are highly uncertain. “It is not guaranteed that Pakistan will be able to secure $2.4 billion from the IMF as budgeted.”