IMF deal improves Pakistan's funding prospects: Moody’s

July 16, 2024 (MLN): Pakistan’s staff-level agreement with the International Monetary Fund (IMF) improves funding prospects for the country, global rating agency Moody’s said on Tuesday.

However, it said that the ability to sustain reforms are key to easing liquidity risks.

On 12 July, the IMF and Pakistani authorities reached a staff-level agreement on a 37-month Extended Fund Facility Arrangement (EFF) of about $7 billion.

The agreement is subject to approval by the IMF Executive Board, although no date has been set for a vote.

In a comment, Moody's said that if the loan deal is approved, which it expects is likely, the new IMF program will improve Pakistan's (Caa3 stable) funding prospects.

The program 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, it said.

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 program, leading to a durable easing of government liquidity risks.

The new IMF EFF comes with conditions of far-reaching reforms, such as measures tobroaden the tax base and removing exemptions and making timely adjustments of energy enterprises' management and privatization, phasing out agricultural support prices and associated subsidies, advancing anti-corruption, governance and transparency reforms, and gradually liberalizing trade policy.

A resurgence of social tensions on the back of high cost of living - which may increase because of higher taxes and future adjustments to energy tariffs - could weigh on reform implementation, it said.

Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain, it said in the comment.

According to an IMF report published in May, Pakistan’s external financing needs is about $21bn for fiscal 2025 (ending June 2025) and about $23bn for fiscal 2026-27.

The agency said that Pakistan’s external position remains fragile, with high external financing requirements over the next three to five years.

The country is vulnerable to policy slippages, it said, adding that weak governance and high social tensions can compound the government’s ability to advance reforms, jeopardizing its ability to complete reviews under the IMF program and unlock external financing.

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