Tag: multilateral partners

  • 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.

  • SBP receives second IMF installment, total disbursements reach $1.9 billion

    SBP receives second IMF installment, total disbursements reach $1.9 billion

    The State Bank of Pakistan (SBP) announced today that it has successfully received the second installment of SDR 528 million, equivalent to $705.6 million, from the International Monetary Fund (IMF).

    This disbursement, slated to be reflected in SBP reserves for the week ending on January 19, 2024, marks a significant step in the ongoing financial collaboration between Pakistan and the IMF.

    The latest disbursement brings the total disbursements under the stand-by arrangement (SBA) to a substantial $1.9 billion.

    It is noteworthy that the remaining $1.1 billion is expected to be received after another comprehensive review scheduled for February 2024.

    As of January 5, 2024, the State Bank of Pakistan’s total reserves stand at $8.15 billion, showcasing the positive impact of the financial support received through the IMF programme.

    To recall, Pakistan secured a $3 billion SBA from the IMF towards the end of FY23, crucially preventing the nation from defaulting on its sovereign debt.

    The disbursement of the IMF funds has been phased out over two installments, subject to meticulous reviews.

    On January 11, 2024, Pakistan successfully completed the first review of the economic reform programme, a significant milestone in ensuring the country’s financial stability.

    Following the board’s approval, the IMF highlighted that economic activity has stabilised, though acknowledging that the outlook remains challenging and is contingent on the implementation of sound policies.

    Pakistan’s 9-month SBA aims to provide a robust policy anchor for addressing both domestic and external balances, serving as a framework for continued financial support from multilateral and bilateral partners.

    This financial collaboration with the IMF is instrumental in navigating Pakistan through economic challenges, providing a solid foundation for sustained growth and stability in the region.

    The country remains committed to implementing prudent economic policies as outlined in the reform programme, with the ongoing support of international partners.

  • IMF’s $3 billion stand-by arrangement expected to bolster Pakistan’s economy and restore investor confidence

    IMF’s $3 billion stand-by arrangement expected to bolster Pakistan’s economy and restore investor confidence

    Pakistan and the International Monetary Fund (IMF) have achieved a significant milestone with the announcement of a staff-level agreement (SLA) on a $3 billion stand-by arrangement (SBA).

    Nathan Porter, the IMF’s Mission Chief to Pakistan, expressed his satisfaction, stating that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of SDR2,250 million (about $3 billion or 111 per cent of Pakistan’s IMF quota).

    The Pakistani economy has been facing multiple challenges since the completion of the seventh and eighth reviews under the 2019 Extended Fund Facility (EFF) in August 2022. The country has experienced external shocks, including devastating floods in 2022 that affected millions of Pakistanis, as well as a surge in international commodity prices due to the conflict in Ukraine involving Russia.

    These shocks, combined with certain policy missteps such as constraints on the foreign exchange market, have resulted in a stagnant economic growth rate. Furthermore, inflation, particularly for essential items, has risen significantly.

    Despite the authorities’ efforts to reduce imports and the trade deficit, foreign reserves have declined to alarmingly low levels. The power sector is also facing liquidity issues, with mounting arrears (circular debt) and frequent load shedding.

    The newly established stand-by arrangement (SBA) will serve as a critical support mechanism for the Pakistani government in stabilising the economy and mitigating the impact of recent external shocks. It aims to maintain macroeconomic stability while providing a framework for financial assistance from both multilateral and bilateral partners.

    The $3 billion funding for a duration of nine months has exceeded expectations and will contribute to restoring investor confidence. The uncertainty surrounding the upcoming change in government after June 2023 has been alleviated to a considerable extent. The agreement also opens avenues for social and development spending by improving domestic revenue generation and ensuring careful execution of expenditures to address the needs of the Pakistani people.

    The successful implementation of steadfast policies is paramount for Pakistan to overcome its current challenges. This includes demonstrating greater fiscal discipline, adopting a market-determined exchange rate to absorb external pressures, and making further progress on reforms, particularly in the energy sector, to enhance climate resilience and improve the business climate.

    Given the formidable obstacles faced by Pakistan, the newly established stand-by arrangement (SBA) serves as both a policy anchor and a platform for financial support from multilateral and bilateral partners in the foreseeable future.

  • Moody’s warns of limited loan options for Pakistan without new IMF programme

    Moody’s warns of limited loan options for Pakistan without new IMF programme

    According to a report by Moody’s Investors Service, Pakistan’s ability to secure loans from bilateral and multilateral partners will be severely limited until a new programme is negotiated with the International Monetary Fund (IMF). The report suggests that it may only become clear whether Pakistan will join another IMF programme after the elections, which are scheduled to take place by October 2023. Furthermore, even if negotiations for a new IMF programme are successful, they are expected to take some time.

    Moody’s warns that Pakistan is unlikely to access affordable market financing from sources such as Eurobonds or commercial banks in the foreseeable future. In fiscal year 2023, the government did not issue any Eurobonds and fell significantly short of its target by raising only Rs521 billion ($2.8 billion) from commercial banks, compared to the target of Rs1.4 trillion set in the fiscal year 2022-23 budget.

    The report also highlights the high external debt repayment burden for Pakistan in the coming years, with approximately $25 billion of repayments (principal and interest) due in fiscal year 2024. Additionally, Pakistan’s foreign exchange reserves are very low at $3.9 billion as of June 2.

    Moody’s further expresses uncertainty about Pakistan’s external funding prospects for fiscal year 2024 and beyond, noting that it is not guaranteed that Pakistan will secure the $2.4 billion from the IMF as budgeted. The IMF has been in talks with Pakistan regarding the ninth tranche of a $6.5 billion bailout package, with the current programme set to expire at the end of June.

    Regarding debt rescheduling, the report mentions that the government is considering rescheduling bilateral debts but has no plans to approach the Paris Club or multilateral partners for debt rescheduling. Moody’s states that a suspension of debt service obligations only to official creditors is unlikely to have direct rating implications, as it would provide the government with additional fiscal resources for essential expenditures in health, social, and infrastructure sectors.

    Moody’s criticises Pakistan’s newly announced budget for the fiscal year 2023-24, noting that it lacks significant revenue-raising or spending-containment measures to alleviate intense government liquidity pressures. The report suggests that the deficit estimates and growth projections in the budget may be overly optimistic, given the economic stresses faced by the country, including government liquidity and external vulnerability pressures, which have been exacerbated by severe floods in August 2022, expected to impact economic activity throughout fiscal year 2024.

    The budget does provide relief measures for households and businesses, including a reduction in fuel and electricity prices, an increase in the minimum wage, and a one-time cash transfer to low-income households. However, a substantial portion of the increased expenditure is allocated to salaries and pensions for government employees, with total employee-related expenses budgeted at Rs1.2 trillion, compared to an estimated spending of Rs960 billion in fiscal year 2023. The government has also earmarked Rs2.8 trillion for grants and subsidies in fiscal year 2024, compared to an estimated Rs2 trillion in fiscal year 2023.

    Pakistan’s low revenue-to-GDP ratio is identified as a major constraint on the government’s debt affordability and debt burden. The budget aims to achieve tax revenue of Rs9.2 trillion in fiscal year 2024, representing a 28 per cent increase from the estimated Rs7.2 trillion in fiscal year 2023. However, Moody’s sees significant downside risks to this revenue projection, given the lack of significant revenue-raising measures and the current economic context.