IMF deal boosts Pakistan’s financing outlook, but reforms critical: Moody’s

• Moody’s says it agrees to provide credible sources of funding from the IMF.
• Implementation of the reforms will be key to the continued liberalization of finance.
• Political risks may jeopardize the implementation of reforms as planned.
  

Moody’s Ratings said that while the new International Monetary Fund (IMF) deal boosts financing prospects for financially troubled Pakistan, strict enforcement of mandated reforms will be key to mitigating future liquidity risks and preventing a another rescue.

The IMF and Pakistani authorities reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) of around $7 billion. The deal, signed on July 12, is subject to approval by the IMF’s Executive Board, although no date has been set for a vote.

“If approved, which we expect is likely, the new IMF program will improve Pakistan’s financing outlook (stable at Caa3),” Moody’s said in its latest report.

He said the program will provide reliable sources of financing from the IMF and catalyze financing from other bilateral and multilateral partners to meet Pakistan’s external financing needs.

“However, the government’s ability to sustain the implementation of reforms will be key to enabling Pakistan to continuously unlock financing during the IMF program, leading to a sustained easing of the government’s liquidity risks.”

However, the rating agency warned that a resurgence of social tensions due to the high cost of living – which may increase due to higher taxes and future adjustments to energy tariffs – could affect the implementation of the reform.

The new IMF EDF comes with extensive reform conditions, including measures to broaden the tax base and remove exemptions and timely adjustment of energy tariffs to restore the viability of the energy sector, the financial services firm said.

“Other measures include improving the management and privatization of state-owned enterprises, phasing out agricultural support prices and related subsidies, promoting anti-corruption, governance and transparency reforms, and gradually liberalizing trade policy” .

In addition, there are still risks that the coalition government will not have a strong enough electoral mandate to consistently implement difficult reforms, he added.

According to an IMF report published in May, Pakistan’s external financing needs are about $21 billion for the fiscal year 2024-25 (ends June 2025) and about $23 billion for the fiscal year 2026-27. Pakistan’s foreign exchange reserves of $9.4 billion as of July 5 are well below its needs.

The country’s external position remains fragile, with high external financing requirements over the next three to five years and its economy vulnerable to policy slippage, according to Moody’s.

“Weak governance and high social tensions can impair the government’s ability to push through reforms, jeopardizing its ability to complete revisions under the IMF program and unlock external financing,” he added.