Govt’s external repayment position in red zone: Moody’s

ISLAMABAD: Highlighting risks for Pakistan’s economy in a fluid political situation, Moody’s — a global credit rating agency — said further deterioration in external position, including widening of current account deficit and erosion of foreign exchange reserves, would threaten the government’s external repayment position.

In its statement, covering the period preceding the passage of no-confidence motion against the PTI government, issued on Monday, the Moody’s said that on March 28, opposition parties in Pakistan tabled a no-confidence motion against the government. “We view the no-confidence motion as credit negative because it raises significant uncertainty over policy continuity, as well as the government’s ability to continue to implement reforms to increase productivity growth and secure external financing, including from the International Monetary Fund (IMF),” the statement said.

The no-confidence motion came at a time when Pakistan is facing surging inflation and widening of current account deficit amid rising global commodity prices.

“A further deterioration in its external position, including a significant widening of the current account deficit and an erosion of foreign-exchange reserves, would threaten government’s external repayment capacity and heighten liquidity risks,” the agency warned.

Pakistan faced significant pressure on its foreign-exchange reserves in recent months, amid rising global commodity prices and a recovery in domestic demand. The Russia-Ukraine military conflict, which has hiked global commodity prices, has amplified pressure on the country’s external position. The country is a net oil importer with petroleum and related products accounting for about 20 per cent of total imports.

Moody’s projected that Pakistan’s current account deficit amounted to more than $12 billion between July 2021 and February 2022, a stark contrast to a $1 billion surplus in the same period a year earlier.

“We now expect the deficit to widen to 5-6% of GDP in fiscal 2022 (ending June 2022) compared withour previous forecast of 4%. This further widening will put greater pressure on Pakistan’s foreign reserves, which declined to $14.9 billion as of February 2022 from $18.9 billion in July 2021, according to IMF data, sufficient to cover only around two months of imports” it added.

Securing external financing, including from the IMF, will be the key to continue to meet Pakistan’s external obligations given the pressures on its foreign-exchange reserves.

However, the no-confidence motion raises significant uncertainty over the government’s capacity to commit to implementing reforms, particularly those aimed at broadening the revenue base. How Pakistan will approach the IMF program from this point on is uncertain, and its participation could be in doubt. Pakistan is undergoing its seventh review under the IMF’s Extended Fund Facility program, which has disbursed $3 billion out of the stipulated $6 billion to date.

The discussions between Pakistan and the IMF appear to have stalled since early March, with the IMF expressing concerns over the PTI government’s relief package in response to rising inflation. Relief measures included subsidies on fuel and electricity prices, as well as a tax amnesty for specified sectors. The ruling party will find it difficult to balance advancing revenue-raising reforms to secure external financing and political pressure from voters facing rising living costs, the statement concluded.