IMF loan uncertainty very high

Moody’s Investors Service has given a “credit negative” signal to Pakistan in the face of prolonged political ambiguity and social tensions over election results, which will make it tough to approach the IMF for a new programme, weaken external economy and make liquidity management more challenging.

In its report titled “Political uncertainty persists in Pakistan following inconclusive election results, a credit negative”, the global credit rating agency said “overall, uncertainty around Pakistan’s ability to quickly negotiate a new IMF programme after the current one expires in April 2024 remains very high. Pakistan’s government liquidity and external vulnerability risks will remain very high until there is clarity on a credible longer-term financing plan.”

It said Pakistan’s foreign exchange reserves remained “very low” at $8 billion as of February 2, 2024, sufficient to cover only about six weeks of imports and well below what was required to meet external financing needs for the next three to four years.

Based on the IMF’s report published in January, Moody’s said Pakistan’s external financing needs were about $22 billion in the next fiscal year (Jul-Jun) 2024-25 and about $25 billion annually in fiscal 2026 and 2027. “The country will need a longer-term financing plan to meet its very large financing needs for the next few years, after its current IMF programme ends in April 2024.”

At present, Pakistan has been assigned a stable rating of “Caa3” by Moody’s. It said prolonged delays in the formation of a government would increase policy and political uncertainty at a time when it faced very challenging macroeconomic conditions.

People voted to elect a new government for the next five years on February 8. No political party including the Pakistan Tehreek-e-Insaf (PTI), Pakistan Muslim League-Nawaz (PML-N) and Pakistan Peoples Party (PPP) won a majority – at least 134 out of the 266 contested seats in the centre – to form a strong government, resulting in a hung parliament.

Laws suggest the new government can be formed in the first 14 days after polls or the president may convene a session of parliament in the maximum of 21 days from the date of elections.

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The caretaker government has clarified that the new government can be established any day till February 29, 2024, dismissing reports of delay in constituting the new government beyond February. The rating agency said “the inconclusive results have exacerbated political tensions amid allegations of vote rigging and tempering by PTI leading to protests in various cities. The results will also begin a complex process of parties trying to secure support from other parties in a bid to lead a coalition government.”

It said even if a combination of parties successfully formed a multiparty coalition government, the coalition may not be very united and politically strong.

The new government will face challenges in securing consensus to pursue difficult but necessary reforms, including revenue-raising measures, to improve macroeconomic conditions.

Moreover, there is also uncertainty around the extent of public protests because they may challenge the legitimacy of the new government. “Social tensions may increase, which would likely constrain the government’s ability to undertake reforms.”

The mixed election results or the alleged tempered results are against financial market expectations and pre-poll survey results, which had suggested PML-N winning majority seats to form a strong government in the centre.

In this backdrop, S&P Global Ratings, in its pre-election commentary, had hinted at upgrading Pakistan’s credit rating to “B” following the new political government came to power. It, however, linked the change in rating from the current “CCC+” with the economic roadmap from the new rulers. S&P said “Pakistan’s road to securing higher credit ratings will depend on whether the elections will bring about a government that can push for tough reforms.”

A government with popular support and the ability to work with key institutions will have a better chance of securing financing from the IMF, S&P analysts including Kim Eng Tan wrote in a February 4 report.

“Together with new policy moves to improve investor confidence and bring down inflation, this could lift fiscal and external metrics sufficiently for sovereign ratings to move to the ‘B’ rating category,” S&P added.

Published in The Express Tribune, February 15^th, 2024.

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