Moody's mixed stance on Pakistan IMF deal

Moody's mixed stance on Pakistan IMF deal

By: Communicators - Business Team (July 16, 2024)

The recent deal between the International Monetary Fund (IMF) and Pakistan is set to significantly improve the country's funding prospects. This agreement typically entails financial support from the IMF in exchange for Pakistan implementing specific economic reforms and policies aimed at stabilizing its economy/ Overall, the IMF deal is a positive development for Pakistan's economy, providing a framework for sustainable economic growth and stability

Global rating agency Mood'y has stated that Pakistan’s agreement with IMF improves funding prospects, but ability to sustain reforms key to easing liquidity risks. The programme will provide credible sources of financing from the IMF and catalyze funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs.

However, the agency cautioned that 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.

The new programme 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, including other measures of improving state-owned entities management and privatization, phasing out agricultural support prices and associated subsidies and gradually liberalizing trade policy.

However, the agency admitted that social tensions, on the back of high cost of living, could weigh in on reform implementation, especially due to higher taxes and future adjustments to energy tariffs. Certain risks are also there as the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain.

In May 2024, IMF observed that the country’s external financing needs is about $21 billion for the year ending on June 2025 and about $23bn for the fiscal year 2026-27. Moody's noted that the foreign reserves held by the country currently are below its needs. The agency said that Pakistan was susceptible to 'policy slippages', adding that weak governance and high social tensions can compound the government’s ability to advance reforms