Moody’s terms no-confidence motion credit negative

Says high current account deficit will threaten Pakistan’s external repayment capacity

KARACHI:

Moody’s Investor Service has termed the no-confidence motion against Prime Minister Imran Khan credit negative and expressed concern that it could act as a hurdle in the way of a smooth reform process in Pakistan.

“We view the no-confidence motion as credit negative because it raises significant uncertainty over policy continuity, as well as the government’s ability to continue to implement reforms to increase productivity growth and secure external financing, including from the International Monetary Fund (IMF),” the ratings agency stated in a report on Thursday.

“The motion comes at a time when Pakistan is encumbered with surging inflation and widening current account deficit amid rising global commodity prices.”

A further deterioration in Pakistan’s external position, including significant widening of the current account deficit and erosion of foreign exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks, it cautioned.

The agency said that Pakistan had faced significant pressure on its foreign exchange reserves in recent months, amid elevated global commodity prices and recovery in domestic demand.

The Russia-Ukraine military conflict, which drove up global commodity prices, has amplified pressure on Pakistan’s external position. The country is a net oil importer, with petroleum and related products accounting for about 20% of total imports.

“We now expect the deficit to widen to 5-6% of GDP in fiscal 2022 (ending June 2022) compared with our previous forecast of 4%,” Moody’s stated.

Read: No-trust move: Moody's concerned for Pakistan's economy

“This further widening will place immense pressure on Pakistan’s foreign reserves, which declined to $14.9 billion as of February 2022 from $18.9 billion in July 2021, which are sufficient to cover only around two months of imports.”

Securing external financing, including from the IMF, will be key for Pakistan to continue to meet its external obligations given the pressure on its foreign exchange reserves.

However, the no-confidence motion raises significant uncertainty over the government’s capacity to commit to implementing reforms, particularly those aimed at broadening the revenue base.

How Pakistan will approach the IMF programme from this point onwards is uncertain, and its participation could be in doubt, the agency said.

Published in The Express Tribune, April 1^st, 2022.

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