Uncertainty around IMF loans is very severe
Given the protracted political uncertainty and societal unrest surrounding the election results, Moody’s Investors Service has assigned Pakistan a “credit negative” rating. This will make it more difficult to approach the IMF for a new program, damage the external economy, and increase the difficulty of managing liquidity.
“Overall, uncertainty around Pakistan’s ability to quickly negotiate a new IMF program after the current one expires in April 2024 remains very high,” the global credit rating agency stated in its report titled “Political uncertainty persists in Pakistan following inconclusive election results, a credit negative.” The problems associated with Pakistan’s external vulnerability and government liquidity will persist unless a credible plan for longer-term financing is established.
According to the report, as of February 2, 2024, Pakistan’s foreign exchange reserves stood at $8 billion, which is insufficient to pay imports for just roughly six weeks and far less than what would be needed to meet the country’s demands for external financing over the next three to four years.
Pakistan’s external funding needs were estimated by Moody’s to be roughly $22 billion in the upcoming fiscal year (Jul-Jun) 2024–2025 and approximately $25 billion yearly in the fiscal years 2026–2027, based on an IMF assessment released in January. “After its current IMF program ends in April 2024, the country will need a longer-term financing plan to meet its very large financing needs for the next few years.”
Moody’s has currently given Pakistan a stable rating of “Caa3.” It claimed that protracted government formation delays would heighten political and policy unpredictability during extremely difficult macroeconomic times.
On February 8, voters cast ballots to choose a new administration for the ensuing five years. There is a hung parliament since no political party, not even the Pakistan Tehreek-e-Insaf (PTI), Pakistan Muslim League-Nawaz (PML-N), or the Pakistan Peoples Party (PPP), was able to secure a majority of seats in the middle (at least 134 out of 266 contested seats).
According to the law, the president may call a meeting of parliament no later than 21 days after the election date, or a new government may be formed within the first 14 days following the polls.
Dismissing reports of a delay in forming the new government past February, the caretaker government has made it clear that the next government can be constituted on any day up until February 29, 2024. The rating agency stated, “Protests in multiple cities have resulted from the inconclusive results, which have exacerbated political tensions amid allegations of vote rigging and tempering by PTI.” The outcomes will also mark the start of a difficult process in which parties will attempt to win over other parties in an effort to form a coalition government.
It stated that a multiparty coalition government might not be particularly strong or united even if a number of parties were able to form one.
To improve macroeconomic conditions, the incoming government will need to garner support for some tough but necessary reforms, like efforts to raise revenue.
The scope of public protests is also unknown because they can cast doubt on the legitimacy of the newly elected administration. “Social tensions could rise, which would probably make it more difficult for the government to implement reforms.”
Pre-election survey data and financial market predictions, which indicated that the PML-N would win majority seats to build a strong government in the center, are at odds with the mixed election results, or the purported tempered results.
Given this context, S&P Global Ratings had alluded to raising Pakistan’s credit rating to a “B” in its pre-election analysis after the country’s new political administration took office. Nonetheless, it connected the new leaders’ economic agenda with the downgrade from the existing “CCC+” rating. “Whether Pakistan’s elections result in a government that can push for tough reforms” is the key to the country’s ability to obtain improved credit ratings, according to S&P.
A government will be more successful in obtaining IMF funding if it has the backing of the public and can collaborate with important organizations. Kim Eng Tan and other S&P analysts filed a report on February 4.
In addition, S&P stated that “this could raise fiscal and external metrics sufficiently for sovereign ratings to move to the ‘B’ rating category, together with new policy moves to improve investor confidence and bring down inflation.”
I am a dedicated student currently in my seventh semester, pursuing a degree in International Relations. Alongside my academic pursuits, I am actively engaged in the professional field as a content writer at the Rangeinn website.
