IMF offers immediate support, but challenges remain: Moody’s

KARACHI: Ratings agency Moody’s termed the International Monetary Fund’s (IMF) bailout imperative to address macroeconomic imbalances and restore investor confidence on Pakistan’s economy.

“An IMF program would be credit positive for Pakistan because access to a cheap, stable source of external financing would provide immediate support to the government’s external financing needs,” Moody’s Investors Service said in a latest credit outlook report coincided with the government’s indecisiveness about the IMF’s loan.

“An IMF program will not only bridge the financing gap but also serve as a strong signal to other official sector creditors that will be crucial to meet financing requirements over the coming years.”

Pakistan has gone to the IMF more than a dozen times since 1980. Its last loan program of $6.7 billion completed in September 2016. “Imbalance rises since the country’s previous IMF program,” Moody’s said.

The credit ratings agency said the IMF support would aid macroeconomic rebalancing and the government’s structural reforms agenda. The country’s foreign exchange reserves adequacy has fallen to the low levels, while they barely cover two months of imports, below the IMF’s threshold of three months. Moody’s said an IMF program will bridge the financing gap and also “give confidence to market and international financial institutions”. “Program will also provide crucial support to recently-elected government,” Moody’s said.

Moody’s said external and fiscal challenges are likely to test nerves despite IMF’s loan, “particularly in light of external borrowing related to projects under CPEC (China-Pakistan Economic Corridor)”. “Higher oil prices will keep the import bill elevated,” it added.

The ratings agency expected gross external financing needs for fiscal 2019 to be around $30 billion, of which $7-8 billion are the government’s external repayments.

“The financing gap – which excludes foreign-exchange reserves – is likely to total $8-$9 billion, taking into account the government’s borrowing plans and our expectations for capital inflows including foreign direct investment and portfolio flows,” it said. “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.”

Moody’s forecast current account deficit at 4.6 percent of GDP in 2018/19, lower than 5.8 percent in 2017/18, but much wider than the average deficit of 1.3 percent in the fiscal years 2013 to 2016.

In January 2017, the government announced exports promotion package, promising tax cuts, to arrest decline of exports. Exports showed a double-digit growth in 2017/18, fetching more than $23 billion in foreign earnings, which are still less than half of $61 billion imports. The present government took a decision to continue the incentives package that expired in June till the fiscal 2021. Together with 25 percent depreciation in rupee value since last year, the stimulus is likely to increase yields for the export-oriented sector and improve its competitiveness. Moody’s said exports package has a promising future “to boost export competitiveness and incentivise investment”.

The ratings agency further said higher government spending was also a reason of macroeconomic imbalance, pushing fiscal deficit up to staggering 6.6 percent in FY2018, up from 5.8 percent the preceding fiscal year. Moody’s said fiscal deficit is expected to slightly narrow to 5.4 percent of GDP in fiscal 2019.