Beyond the expiry of the International Monetary Fund (IMF) programme in September 2022, the Pakistan government’s ability to sustain reform momentum, particularly aimed at further broadening revenue base, or to commit to an immediate successor programme is uncertain given elections are scheduled to take place by late 2023, says Moody’s Investor Service (Moody’s).

The rating agency in its latest report has termed IMF successful disbursement as credit positive, shoring up Pakistan’s foreign exchange reserves, which have faced significant pressures in recent months amid a sharp widening in the current-account deficit as higher global oil and commodity prices contributed to a yawning goods trade deficit.

The credit rating agency acknowledges Pakistan’s reform progress, in its recent report.

Moody’s stated that on 2 February, the IMF completed the sixth review under the Extended Fund Facility (EEF) for Pakistan (B3 stable), unlocking an additional $1 billion under the $6 billion loan facility.

Under the programme, the Pakistani government has committed to several structural reforms, with a view to placing the economy on a path of sustainable and balanced growth. Progress in its reform agenda has previously helped Pakistan successfully unlock $2 billion in disbursements from the IMF programme.

The credit rating agency explained that from July to December 2021, the current-account deficit was a cumulative $9.0 billion, compared with a surplus of $1.2 billion during the same period a year earlier.

The rapid widening in the current-account deficit led to a drawdown in foreign-exchange reserves, which declined to $14.4 billion in November 2021 from $18.9 billion in July 2021, according to IMF data.

The injection of $3 billion financing from Saudi Arabia (A1 stable) to Pakistan in December boosted the latter’s foreign reserves to $16 billion in that month. In light of these findings, Moody projects the current-account deficit to widen to 3.0-3.5 percent of GDP in the fiscal year 2022.

Thereafter, it also expects a moderation in global oil and commodity prices to contain growth in the import bill, while the ongoing global economic recovery supports exports and remittance inflows. It assumes that the current-account deficit will narrow and stabilise at 2 percent-3 percent of GDP through the subsequent two to three-year period.

Beyond reserves, Moody’s acknowledged that the completion of the IMF review and successful disbursement reflect recent gains and prospective improvements in Pakistan’s institutions and governance strength. It also pointed out the IMF’s acknowledgment of the greater credibility of Pakistan’s macroeconomic and fiscal management.

More orthodox monetary policy has complemented the country’s recent efforts to shore up fiscal finances, including several amendments to the existing tax regime under the Finance (Supplementary) Bill 2021. Moody’s notes that the strengthening of central bank autonomy through the State Bank of Pakistan (SBP) Amendment Bill 2021 will add credibility to the SBP’s ability to target inflation and restrain direct financing of government debt. Further traction on tax reforms will likely drive a gradual increase in revenue with a concomitant improvement in debt affordability.

“Nevertheless, the IMF also noted the need for further structural reforms, particularly in the energy and state-owned enterprise sectors, to foster a business environment conducive to investments and private sector development. Sustained progress in these areas will not only raise economic productivity and competitiveness, but also reduce contingent liability risks to the sovereign,” it added.

Moody’s believes Pakistan remains committed to advancing other reforms under the IMF programme, likely unlocking further disbursements. However, beyond the expiry of the programme in September 2022, the government’s ability to sustain reform momentum, particularly reforms aimed at further broadening its revenue base, or to commit to an immediate successor programme is uncertain given elections are scheduled to take place by late 2023.

The story was originally published in Business Recorder on January 5, 2022.