Moody’s Ratings said on Tuesday that the new International Monetary Fund (IMF) programme will improve Pakistan’s (Caa3 stable) funding prospects, but warned Islamabad’s ability to sustain reform implementation will be key to unlock financing over the three-year duration.
The IMF and Pakistan reached a staff-level agreement on July 12, paving way for another three-year loan with the Washington-based lender as Islamabad pledges additional reforms in its troubled economy for the $7-billion Extended Fund Facility. It comes right after a $3-billion Stand-By Arrangement (SBA) ended in April.
The IMF, in its statement, also said that the new EFF is subject to approval by its Executive Board and obtain “timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners.”
Moody’s said the new programme will provide credible sources of financing from the IMF and catalyse funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs.
Country is vulnerable to policy slippages. Weak governance and high social tensions can compound the government’s ability to advance reforms, jeopardising its ability to complete reviews under the IMF programme and unlock external financing: Moody’s
“However, the government’s ability to sustain reform implementation will be key to allowing Pakistan to continually unlock financing over the duration of the IMF programme, leading to a durable easing of government liquidity risks,” Moody’s said in its note.
“The new IMF EFF comes with conditions of far-reaching reforms, such as measures to broaden the tax base and removing exemptions and making timely adjustments of energy tariffs to restore the energy sector viability.
“Other measures include improving state-owned enterprises’ management and privatisation, phasing out agricultural support prices and associated subsidies, advancing anti-corruption, governance and transparency reforms, and gradually liberalizing trade policy.
“A resurgence of social tensions on the back of high cost of living – which may increase because of higher taxes and future adjustments to energy tariffs – could weigh on reform implementation.
“Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain. According to an IMF report published in May, Pakistan’s external financing needs is about $21 billion for fiscal 2025 (ending June 2025) and about $23 billion for fiscal 2026-27. Pakistan’s foreign exchange reserves of $9.4 billion as of 5 July is well below its needs.
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Moody’s stressed that Pakistan’s external position remains fragile, with high external financing requirements over the next three to five years.
“The country is vulnerable to policy slippages. Weak governance and high social tensions can compound the government’s ability to advance reforms, jeopardising its ability to complete reviews under the IMF programme and unlock external financing.”
Moody’s had downgraded government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa3 from Caa1 in February 2023.
At the time, it said the decision to downgrade the ratings is driven by its assessment that Pakistan’s increasingly fragile liquidity and external position significantly raises default risks to a level consistent with a Caa3 rating.
In February 2024, Moody’s said Pakistan’s credit rating “would likely be upgraded” if its government’s “liquidity and external vulnerability risks decreased materially and durably”.
The rating agency, in its announcement of the periodic review, also maintained Pakistan’s credit rating unchanged at ‘Caa3’ for long-term issuer rating, with a stable outlook.
Pakistan has been hoping for a ratings upgrade for months, with finance minister Muhammad Aurangzeb also briefing Moody’s on the reforms undertaken in April this year.
Last month, Moody’s had stated Pakistan government’s newly-announced budget for fiscal year 2024-25 would “likely support” Islamabad’s ongoing talks with the IMF for the new EFF.