IMF program a credit positive for Pakistan: Moody's

October 18, 2018 (MLN): Moody’s Investment Company, an American business and financial services company has remarked that an IMF program would be credit positive for Pakistan and would also aid in macroeconomic rebalancing and the government’s structural reform agenda. However, while IMF program provides immediate external funding support, external and fiscal challenges will remain.

In its Credit Outlook report published yesterday, Moody’s has stated that An IMF program would be credit positive for Pakistan because access to a cheap and stable source of external financing would provide immediate support to the government’s external financing needs.

However in light of investments, imports and external borrowing related to projects under the China-Pakistan Economic Corridor (CPEC), external and fiscal challenges will persist.

The narrative further adds that due to the existing economic predicament of the country, it is expected that the current-account deficit will reach 4.6% of GDP in fiscal 2019 (which ends June 2019), which is slightly narrower than the 5.8% deficit in fiscal 2018 but wider than the average deficit of 1.3% fiscal 2013-16.

“In part owing to the wide current-account deficit, we estimate Pakistan’s gross external financing needs for fiscal 2019 to be around $30 billion, of which $7-$8 billion are the government’s external repayments,” forecasted the Credit Outlook report.

According to Moody’s, an IMF program will not only bridge the financing gap but will also serve as a strong signal to other official sector creditors which is crucial to meet financing requirements over the coming years. “This is particularly the case if a more front-loaded program provides greater market confidence when Pakistan’s upcoming Eurobond and sukuk repayments totaling $1 billion each are due in April and December 2019, respectively.”

Yet, in the absence of further macroeconomic adjustments, external and fiscal risks are expected to persist. Ongoing implementation of CPEC projects, which will likely amount to 9%-10% of GDP in fiscal 2019, and higher oil prices will keep the import bill elevated, says the report.

Considering the Pakistani government's export package which aims to boost export competitiveness, Moody’s pointed out that although this package’s extension for three more years will benefit exports, there will remain half the level of goods imports.

“We expect the fiscal deficit to narrow slightly to 5.4% of GDP in fiscal 2019 after a deficit of 6.4% in fiscal 2018, notwithstanding the governments recently announced mini-budget to cut development spending and raise revenue through import duties and other administrative measures,” concluded the narrative.

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