IMF’s staff-level agreement a credit positive for Pakistan: Moody’s

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Moody’s Investors Service has said that the International Monetary Fund’s (IMF) staff-level agreement with Pakistan will ease pressure on the country’s foreign exchange reserves, terming the development as a credit positive for the economy.

Last week, IMF staff and Pakistani authorities reached a staff-level agreement on policies to complete the combined seventh and eighth reviews of Extended Fund Facility (EFF). The IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access by SDR 720 million that will bring the total access under the EFF to about $7 billion.

“The agreement is credit positive for Pakistan because it paves the way for the release of $1.2 billion in IMF financing at a time when its foreign exchange reserves are under significant pressure,” said Moody’s on Monday.

The credit ratings agency said that completion of the reviews is also likely to unlock additional funding from other multilateral and bilateral partners.

Pakistan’s current account deficit has widened since mid-2021 on higher food and oil prices and stronger demand for imports; combined with domestic political uncertainty, this has driven a sharp depreciation in the Pakistani rupee, further pushing up import costs.

“However, we expect the deficit to narrow to 3.5%-4% of GDP in fiscal year 2023 from 4.5%-5% in fiscal 2022 as imports moderate amid slowing growth and measures to curb nonessential imports,” said Moody’s.

The agency expected Pakistan’s financing needs to remain high in fiscal year 2023 amid continued high global commodity prices and the need to repay external debt.

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Moody’s said that the country’s foreign exchange reserves are expected to increase slightly in June on the back of a $2.3 billion loan from Chinese state banks.

The credit ratings agency expects Pakistan to get the IMF Executive Board approval for the $1.2 billion disbursement in the third quarter of this year.

“We also expect Pakistan to maintain its engagement with the IMF, which would catalyse financing from other external sources as it focuses on policy priorities that the IMF has identified, including implementing the fiscal 2023 budget, making progress on power sector reforms, lowering inflation, reducing poverty, enhancing governance and mitigating corruption.

“In this scenario, we expect Pakistan to be able to meet its external financing needs for the next few years,” it said.

However, Moody’s remained concerned over Pakistan’s ability to complete the current EFF programme and maintain a credible policy path as the country battles elevated inflation and a higher cost of living.

“The government may also find it difficult to continually enact revenue-raising reforms, such as steadily increasing petroleum levies and raising power tariffs, particularly in the run-up to the next general elections scheduled for mid-2023,” said Moody’s.

Moody’s statement comes at a time when Pakistan has been thrown deeper into political uncertainty after the Punjab by-polls held on Sunday. Unofficial results suggest a victory for the Pakistan Tehreek-e-Insaf (PTI), which has renewed calls for holding general elections.

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