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Home Economy

IMF Agreement is Beneficial for Pakistan’s Crippled Economy: Moody’s

by News Publishing
July 18, 2022
in Economy
Reading Time: 3 mins read
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Inflation in Pakistan could average 33pc in the first half of FY23, says Moody’s economist
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The staff-level agreement between the International Monetary Fund (IMF) and Pakistan is credit positive for the country because it will allow for the release of $1.2 billion in IMF financing, which is needed at a time when the country’s foreign exchange reserves are under significant pressure, according to Moody’s Investors Service (Moody’s).

IMF staff and Pakistani authorities reached a staff-level agreement on policies to complete the combined seventh and eighth reviews of Pakistan’s (B3 negative) Extended Fund Facility (EFF). 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.

Pakistan is working to complete a review of its economic program with the International Monetary Fund (IMF), which is expected to unlock additional financing from other partners, according to Moody’s.

The IMF’s Executive Board will consider extending the program until the end of June 2023 and increasing its size by $1 billion to $7 billion, to support Pakistan’s program implementation and meet its higher financing needs in fiscal 2023, as well as support its ability to attract additional financing from other external sources.

The current account deficit has widened since mid-2021 due to higher food and oil prices and stronger demand for imports. political uncertainty has also driven a sharp depreciation in the Pakistani rupee, further pushing up import costs.

However, the deficit is expected to narrow to 3.5 percent-4 percent of GDP in fiscal 2023 from 4.5 percent-5 percent in fiscal 2022 as imports moderate amid slowing growth and measures to curb nonessential imports.

Pakistan’s financing needs will remain high in fiscal 2023, according to a credit rating agency, amid continued high global commodity prices and the need to repay external debt. The agency said that foreign exchange reserves declined to $8.9 billion in May, according to IMF data, sufficient to cover less than two months of imports, though we expect them to increase slightly in June on the back of a $2.3 billion loan from Chinese state banks.

“We expect the IMF Executive Board to approve the $1.2 billion disbursement in the third quarter of this year.

We also expect 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.

In this scenario, we expect Pakistan to be able to meet its external financing needs for the next few years”, said the rating agency.

Moody’s has stated that Pakistan faces significant uncertainty in its ability to complete the current EFF program and maintain a credible policy path. Additionally, high inflation and the associated 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, it added.

Tags: IMF AgreementlatestMoody’sPakistan’s Crippled Economystaff-level agreement
News Publishing

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