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Moody's paints bleak picture of Pakistan's external position

Pakistan's government liquidity and external vulnerability risks are elevated, Moody's says

By AFP & Web Desk
February 11, 2023
A sign for Moodys rating agency stands in front of the company headquarters in New York, September 18, 2012. - AFP/ File
A sign for Moody's rating agency stands in front of the company headquarters in New York, September 18, 2012. - AFP/ File

The International Monetary Fund (IMF) is likely to demand Pakistan to take revenue-raising measures among prior actions before it releases the next tranche of assistance to the crisis-hit country, Moody's Investors Service said.

The talks between Pakistan and the global lender are set to begin virtually in the coming week, after 10 days of consistent talks in Islamabad in which Pakistan failed to secure a deal.

Pakistan is hoping to receive at least $1.1 billion in funding that has been frozen.

Meanwhile, Moody's said that Pakistan's external position was under significant stress, Reuters reported.

"Pakistan's government liquidity and external vulnerability risks are elevated, and there remains considerable risks around Pakistan's ability to secure required financing to fully meet its needs for the next few years," a statement released by the credit rating company said.

The agency further stated that the IMF — in its statement — noted that considerable progress was made during the visit on policy measures to address domestic and external imbalances, "there is no certainty yet on whether, and if so when, IMF financing will be forthcoming".

"The financing from IMF, which is likely to also catalyse funding from other multilateral and bilateral partners, is crucial to alleviate Pakistan’s liquidity stresses," Moody's added.

"Pakistan’s external position is under significant stress, following delays in securing official sector financing which have driven a continued decline in Pakistan’s foreign exchange reserves."

The country's economy is in dire straits, stricken by a balance-of-payments crisis as it attempts to service high levels of external debt amid political chaos and deteriorating security.

Inflation has rocketed, the rupee has plummeted and the country can no longer afford imports, causing a severe decline in the industry.

The IMF is demanding that the nuclear-armed nation boost its pitifully low tax base, end tax exemptions for the export sector, and raise artificially low petrol, electricity, and gas prices meant to help low-income families.

Prime Minister Shehbaz Sharif previously called the conditions for the $1.2 billion loan instalment "beyond imagination".

Finance Minister Ishaq Dar addressed the nation after the IMF team left the country on Friday morning, saying talks had "concluded successfully" and that a draft memorandum on broadly agreed policies had been shared by the lender with the government.

He said petrol prices would rise by roughly 4% and additional taxes would be imposed, without giving further details.

On Thursday, the central bank released data saying its foreign exchange reserves had plunged by $170 million in a week, standing at just $2.9 billion as of last Friday.

Since January, the world's fifth most populous nation is no longer issuing letters of credit, except for essential food and medicine, causing a backlog of raw material imports the country can no longer afford.

The logjam coupled with the rupee devaluation has sparked a major decline in manufacturing, including textiles and steel, and building projects.

"This situation has triggered fears the construction industry will close down very soon, plunging thousands of labourers into unemployment," Syed Ashfaq Hussain, head of the Constructors Association of Pakistan, told AFP.

While the IMF cash injection will not be enough to rescue Pakistan on its own, the government hopes it will boost confidence and encourage friendly nations such as Saudi Arabia, China, and the UAE to offer further loans.

"We will get temporary relief but it's not a permanent solution for the economy. More reforms are needed at the government level," a senior government official told AFP.

Pakistan has made and broken more than a dozen IMF deals in recent decades as parties renege on agreements that hurt their political survival.