IMF deal boosts Pakistan’s financing outlook: Moody’s

PAKISTAN:

Global rating agency Moody’s said on Tuesday that Pakistan’s staff-level agreement with the International Monetary Fund (IMF) has improved its financing outlook, but the ability to sustain reforms is key to easing liquidity risks.

In a press release, Moody’s emphasizes that Pakistan’s success depends on its ability to sustain key reforms to mitigate liquidity risks and ensure the long-term sustainability of the program.

The 37-month Extended Fund Facility Arrangement (EFF), agreed on July 12 and pending IMF Executive Board approval, is expected to provide reliable financing and attract further support from bilateral and multilateral partners.

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

Moody’s underlines the importance of Pakistan’s commitment to implement far-reaching reforms such as broadening the tax base, eliminating exemptions, timely adjustment of energy tariffs to restore the viability of the sector, improving the management of state-owned enterprises, promoting of privatisations, the phasing out of agricultural support prices and subsidies and strengthening of anti-corruption, governance and transparency measures. In addition, the gradual liberalization of trade policy is crucial.

Despite these steps, Moody’s recognizes potential challenges, including social tensions arising from the high cost of living, which may be exacerbated by higher taxes and adjustments to energy tariffs. The possibility that the coalition government will not have a strong mandate to consistently implement these tough reforms also poses a risk.

Pakistan’s external position remains fragile, with significant external financing needs in the coming years. The country’s foreign exchange reserves are currently well below the necessary level, which makes it vulnerable to policy mistakes. Weak governance and high social tensions could further hamper the government’s reform efforts, potentially threatening the completion of IMF audits and access to external financing.

Moody’s emphasizes that consistent implementation of reforms is critical for Pakistan to fully benefit from the IMF program and achieve a sustainable reduction in liquidity risks.