No-Trust Move To Increase Pakistan’s Policy Uncertainty: Moody’s

Web Desk — In a note on Thursday, Moody’s Investor Service warned that a no-confidence motion against Prime Minister Imran Khan would increase policy uncertainty amid rising inflation, widening current account deficits, and depleting foreign exchange reserves.

Given the associated gaps in policy and decision-making, the New York-based credit rating agency deemed the situation “credit negative.” “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).”

According to Moody’s, the motion came at a time when Pakistan was facing surging inflation and widening current account deficits amid rising global commodity prices. The report noted that further deterioration in its external position, including an expansion of the current account deficit and erosion of foreign-exchange reserves, would threaten the government’s ability to repay its external debts and heighten liquidity risks.

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

“We now expect the deficit to widen to 5-6pc of GDP in fiscal 2022 (ending June 2022) compared with our previous forecast of 4pc,” Moody’s said.

According to IMF data, Pakistan’s foreign reserves, which declined to $14.9bn in February 2022 from $18.9bn in July 2021, are sufficient to cover only around two months of imports.

“Securing external financing, including from the IMF, will be key for Pakistan to continue to meet its external obligations given the pressures on its foreign-exchange reserves,” the rating agency said.

The report noted, however, that the “no-confidence motion raises serious concerns over the government’s ability to implement reforms, especially those aimed at broadening the revenue base”. Pakistan’s participation in the IMF program could be in doubt as to how it will approach the program from this point on.

Pakistan is undergoing its seventh review under the Extended Fund Facility programme, which has disbursed $3 billion, out of the stipulated $6 billion. Despite this, discussions between Pakistan and the IMF have stalled since early March, with the Fund expressing concerns over the government’s recent relief package. Among the relief measures were subsidies on fuel and electricity, as well as a tax amnesty for specific sectors.

Moody’s predicts that, regardless of the result of the no-confidence vote, the ruling party would find it difficult to balance advancing revenue-raising reforms to secure external financing and political pressure from voters facing rising living costs.