Tag: Moody's

  • IMF deal to improve Pakistan’s financial outlook, but continuous reforms are essential: Moody’s

    IMF deal to improve Pakistan’s financial outlook, but continuous reforms are essential: Moody’s

    Moody’s Investors Service has stated that Pakistan’s recent staff-level agreement with the International Monetary Fund (IMF) enhances the nation’s funding prospects.

    However, the global rating agency stressed the necessity of sustained reforms to mitigate liquidity risks.

    On 12 July, Pakistani authorities and the IMF reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) worth approximately $7 billion. This agreement still awaits approval from the IMF Executive Board, with no specific date set for the vote.

    Moody’s commented that once the loan deal is approved, which is highly anticipated, it will significantly boost Pakistan’s funding prospects. The new IMF program is expected to provide reliable financing from the IMF and attract additional funding from other bilateral and multilateral partners, addressing Pakistan’s external financing needs.

    Nonetheless, Moody’s cautioned that the government’s ability to consistently implement reforms will be crucial to maintaining continuous financial support throughout the IMF program, ultimately reducing liquidity risks.

    The new IMF EFF requires Pakistan to undertake extensive reforms, including broadening the tax base, eliminating exemptions, timely managing and privatising energy enterprises, phasing out agricultural support prices and related subsidies, advancing anti-corruption measures, enhancing governance and transparency, and gradually liberalising trade policy.

    Moody’s also warned that rising social tensions, driven by the high cost of living—which could be exacerbated by increased taxes and future energy tariff adjustments—might hinder reform implementation. Furthermore, the coalition government may struggle to maintain sufficient electoral support to implement these challenging reforms consistently.

    An IMF report published in May highlighted Pakistan’s external financing needs, estimated at $21 billion for fiscal year 2025 (ending June 2025) and approximately $23 billion for fiscal years 2026-2027.

    Moody’s noted that Pakistan’s external position remains precarious, with substantial external financing requirements over the next three to five years.

    The country remains vulnerable to policy slippages, weak governance, and high social tensions, which could impair the government’s ability to advance reforms, complete IMF program reviews, and secure external financing.

  • Moody’s cautions on Pakistan’s fiscal challenges despite recent stability

    Moody’s cautions on Pakistan’s fiscal challenges despite recent stability

    Moody’s Investors Service, a global credit rating agency, stated on Tuesday that Pakistan’s credit rating could see an upgrade if the government successfully reduces liquidity and external vulnerability risks.

    Despite this potential, Moody’s maintained Pakistan’s credit rating at ‘Caa3’ for long-term issuer rating with a stable outlook in its periodic review.

    The credit profile of Pakistan reflects significant liquidity and external vulnerability risks, attributed to low foreign exchange reserves insufficient to meet high external financing needs in the near to medium term, according to Moody’s.

    The agency also highlighted the country’s very weak fiscal strength and elevated political risks as constraints on its credit profile.

    Moody’s expressed uncertainty regarding the new government’s ability to swiftly negotiate a new International Monetary Fund (IMF) programme after the ongoing programme concludes in April.

    While acknowledging Pakistan’s large economy and moderate growth potential, the agency emphasized the nation’s high liquidity and external vulnerability risks, despite economic stability maintained by the caretaker government and recent reforms.

    The agency recognised the government’s efforts to unlock financing from the IMF and other partners, resulting in a modest accumulation of foreign exchange reserves.

    However, it cautioned that, despite meeting external debt obligations for the fiscal year ending June 2024, there is limited visibility on sources of financing to address high external financing needs post-the current IMF stand-by arrangement.

    Moody’s rationale for the stable outlook at the Caa3 rating level is based on the assessment that pressures on Pakistan align with this rating, with broadly balanced risks.

    The agency suggested that continued IMF engagement beyond the current programme could attract additional financing from other partners, reducing default risk.

    Nonetheless, it emphasised the substantial external financing required and low reserve position, indicating potential default risks with funding delays.

    Moody’s indicated that an upgrade in Pakistan’s rating could occur with a substantial and sustained reduction in liquidity and external vulnerability risks, coupled with increased foreign exchange reserves and fiscal consolidation.

    Conversely, a downgrade might be likely if Pakistan defaults on debt obligations with significant losses to creditors.

    The agency expressed uncertainty regarding the new government’s ability to negotiate a new IMF programme swiftly after the ongoing one expires in April, citing high political risks following the controversial general elections held on February 8, 2024.

    Moody’s warned that without a new programme, Pakistan’s ability to secure loans from other partners would be severely constrained.