The International Monetary Fund’s (IMF) staff-level agreement with Pakistan, which paves the way for a $7 billion loan, offers a much-needed boost to the country’s funding prospects, according to Moody’s Ratings.
However, the agency emphasizes that Pakistan’s ability to sustain the implementation of crucial reforms will be key to easing liquidity risks and ensuring the long-term success of the program.
The 37-month Extended Fund Facility Arrangement (EFF) agreed upon on July 12th, pending approval by the IMF Executive Board, is expected to provide credible financing sources and attract additional support from bilateral and multilateral partners.
Moody’s highlights that the success of the program hinges on Pakistan’s commitment to implementing far-reaching reforms, including broadening the tax base and eliminating exemptions, timely adjustments to energy tariffs to restore sector viability, improving state-owned enterprise management and privatization, phasing out agricultural support prices and subsidies, advancing anti-corruption, governance, and transparency reforms, gradually liberalizing trade policy.
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However, the agency acknowledged potential challenges to reform implementation, including increased social tensions due to the high cost of living, which could be further exacerbated by higher taxes and energy tariff adjustmentsand the possibility of the coalition government lacking a strong enough mandate to consistently implement difficult reforms
Pakistan’s external position remains fragile, with significant external financing needs over the next several years. The country’s foreign exchange reserves are currently well below its requirements, making it vulnerable to policy slippages. Weak governance and high social tensions could further hinder the government’s ability to advance reforms, potentially jeopardizing the completion of IMF reviews and access to external financing.
Moody’s emphasizes that sustained reform implementation is crucial for Pakistan to unlock the full potential of the IMF program and achieve a durable easing of liquidity risks.
