Moody's Investors Service (Moody's) on Thursday downgraded Pakistan’s outlook to negative from stable. It affirmed Government of Pakistan's B3 local and foreign currency issuer and senior unsecured debt ratings.
“The decision to change the outlook to negative is driven by Pakistan's heightened external vulnerability risk and uncertainty around the sovereign's ability to secure additional external financing to meet its needs,” read the statement.
The ratings agency said Pakistan's external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and – already thin – foreign exchange reserves, especially in the context of heightened political and social risk.
“Pakistan's weak institutions and governance strength adds uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing,” it stated.
An agreement with IMF could take longer than expected, as the government may find it difficult to reduce fuel and power subsidies given rising inflation: Moody's
However, Moody’s maintained a B3 rating, which reflects that despite the abovementioned risks, Pakistan will conclude the seventh review under the IMF Extended Fund Facility (EFF) programme by the second half of this calendar year. This will lead “to additional financing from other bilateral and multilateral partners”.
“In this case, Moody's assesses that Pakistan will be able to close its financing gap for the next couple of years,” it said.
Current account deficit
Moody's said that it expects Pakistan's current account to remain under significant pressure, on the back of elevated global commodity prices through 2022 and 2023.
Moody's projects the current account deficit to come in at 4.5-5% of GDP for fiscal 2022 (ending June 2022), slightly wider than the government's expectations.
As global commodity prices decline gradually in 2023 and as domestic demand moderates, Moody's expects the current account deficit to narrow to 3.5-4% of GDP. Its forecasts are higher than previous (early February 2022) projections of 4% and 3% for fiscal 2022 and 2023, respectively.
The larger current account deficits underscore the need for Pakistan to secure additional external financing, especially given its low foreign exchange reserves.
Pakistan is currently in negotiations with the IMF on the seventh review of the EFF programme.
“Conclusion of the seventh review, and further engagement with the IMF, will also help Pakistan secure financing from other bilateral and multilateral partners. In this scenario, Moody's expects Pakistan to be able to fully meet its external obligations for the next couple of years.
“However, Moody's assesses that the balance of risks is on the downside. An agreement with IMF could take longer than expected, as the government may find it difficult to reduce fuel and power subsidies given rising inflation."
Moody's stated that if Pakistan is unable to secure additional financing later this year, foreign exchange reserves will continue to be drawn down from already very low levels, increasing the risk of a balance of payments crisis.
Pakistan's foreign exchange reserves currently stand at less than $10.1 billion, raising concerns on the balance-of-payments position as rising oil prices and bulging import bill put pressure on the currency as well.
At the same time, heightened political unrest amid calls to hold early elections by Pakistan Tehreek-e-Insaf Chairman Imran Khan, and delay in revival of the IMF programme have all added to the country's economic woes.