Moody’s Investors Service on Monday termed the staff level agreement (SLA) signed by Pakistan with the International Monetary Fund (IMF) for the revival of its programme as ‘credit positive’ and hoped it would ease pressure on declining foreign exchange reserves.

But the credit rating agency wondered whether the government could afford to keep raising petroleum taxes and electricity tariffs in the run-up to the 2023 general elections.

“The agreement is credit positive for Pakistan because it paves the way for the release of $1.2 billion in IMF financing at a time when its foreign exchange reserves are under significant pressure”, said Moody’s. This is likely to unlock additional funding from other multilateral and bilateral partners.

It, however, warned that Pakistan’s ability to complete the current programme and maintain a credible policy path that supports further financing remains highly uncertain, while elevated inflation and a higher cost of living are adding to social and political risks.

The government may also find it difficult to continually enact revenue-raising reforms, such as steadily increasing petroleum levies and raising power tariffs, particularly in the run-up to the next general elections scheduled for mid-2023.

The Moody’s comments based on SLA reached on July 14 for completion of 7th and 8th reviews for disbursement of $1.2bn, subject to approval by the IMF Executive Board, did not take into account the election setback to the PMLN in the country’s largest Punjab province.

The agency also expected the country’s current account deficit had widened since mid-2021 on higher food and oil prices and stronger demand for imports combined with domestic political uncertainty, leading to a sharp devaluation of Pakistan’s currency and resultant further jump in import costs.

It estimated the current account deficit to narrow to 3.5-4pc of GDP in the fiscal year 2023 from 4.5-5pc in fiscal 2022 as imports moderate amid slowing growth and measures to curb nonessential imports. However, Pakistan’s financing needs would remain high amid continued high global commodity prices and the need to repay external debt, it said.

Moody’s expected “the IMF Executive Board to approve the $1.2bn disbursement in the third quarter of this year” and added that it also expected Pakistan to maintain its engagement with the IMF, which would catalyze financing from other external sources as it focuses on policy priorities that the IMF has identified, including implementing the fiscal 2023 budget, making progress on power sector reforms, lowering inflation, reducing poverty, enhancing governance and mitigating corruption.

The agency said it expected Pakistan to be able to meet its external financing needs for the next few years.


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