Moody’s says so

If Moody’s says so, then it’s got to be true. Delivering Pakistan a precious feather-in-the-cap upgrade at this fragile time, the ratings agency said it expected the “IMF board to approve the EFF (Extended Fund Facility) in the next few weeks”.

That ought to end all the uncertainty, since you wouldn’t expect Moody’s to stake its capital on a guess. Or would you? It was right up there along with other premier agencies, after all, when their triple-A ratings led the investment world right into the mouth of the great recession of 2008. So, what do you really know?

Besides, BR Research – the gold standard in media research in this country – may just have provided the proverbial pinch of salt to temper Moody’s optimism. “There are indications that Pakistan’s inclusion on the IMF board meeting agenda could be postponed until the end of September, with the possibility of further delays,” it reported.

That’s because nobody’s yet answered the one question that matters the most right now. When will we – or won’t we – get the final nod from friendly countries about loan rollovers that will trigger the EFF? Or will that, too, only get us as far as the agenda for the end-September board meeting? There’s no clarity.

Moody’s, for example, “expects” the government to secure all the necessary funding “from official partners”, without explaining how or when, which is what continues to feed the rumour mill that the BRR piece went on to mention. Remember the finance minister initially kept mum about this stipulation being included in the Fund’s growing list of “upfront conditions”. He was only forced into accepting it at an uncomfortable press conference when the euphoria from the SLA (staff level agreement) began to fade.

We’ve heard nothing but the all-is-well chorus since he went to China, Saudi Arabia and the UAE to ask for those rollovers. But it has reached the press that the Chinese are unhappy and the Arabs are silent. That disappointment is clearly behind the smart idea of going fishing for high-interest loans from UAE banks. But that’s turned into quite the pickle too because, reportedly, they are asking for the IMF’s greenlight before committing their money, while the Fund wants the money before it agrees. Hence all the uncertainty; the one thing markets hate even more than bad news.

Interestingly, Moody’s also said that “sustained reform implementation, including revenue-raising measures, can increase the government revenue base and improve Pakistan’s debt affordability” just as traders were preparing for a countrywide shutdown because the government finally dared to tax one of the most protected, tax-evading sectors in the country. The government has compromised its own revenue base for the longest time by letting powerful and politically connected big fish easily escape the tax net.

Even now, when the economy is so dangerously close to falling into a death spiral, the same sectors continue to enjoy much the same protection. And, with opposition parties playing politics and joining the traders’ protest, the uncertainty about the tax drive adds to the uncertainty about the revenue stream which in turn feeds into the uncertainty about the EFF.

Moody’s also appreciates “Pakistan’s improving macroeconomic conditions and moderately better government liquidity and external positions”, and that “foreign exchange reserves have doubled since June 2023”, but also admits that they “remain below what is required to meet its external financing needs”. Yet if they’re still not enough, and that funding is central to staying solvent enough to avoid certain default, and their doubling in a year doesn’t really get us out of the woods, what’s there to cheer?

Overall, it seems Moody’s is pretty confident about securing the rollovers and the EFF, yet it is not very sure about the “government’s ability to sustain reform implementation”. It fears the coalition government may not have “sufficiently strong electoral mandate to continually implement revenue raising measures without stoking social tensions”. But that’s also very confusing.

Is it assuming a snap election and a government with a strong mandate to carry out the EFF’s structural reforms? Or did it give the upgrade because it feels the present setup will be able to secure the loan but not implement its conditions, which will unravel the facility and ensure a tumble into default?

Also, what makes it so sure that such a government – with a strong mandate – will be able to implement reforms that require millions of households to pay more in taxes than their entire incomes to make up for the billions that the rulers squandered and broke the economy?

Copyright Business Recorder, 2024