The successful disbursement of funds by the International Monetary Fund (IMF) has been deemed credit positive by Moody’s Investor Service, bolstering Pakistan’s foreign exchange reserves, which have been under pressure in recent months due to a sharp widening of the current-account deficit as higher global oil and commodity prices contributed to a yawning goods trade deficit.
The IMF conducted the sixth review under the Extended Fund Facility (EEF) for Pakistan (B3 stable) on February 2, according to Moody’s report, unlocking an extra $1 billion under the $6 billion loan facility. The Pakistani government has committed to many structural reforms as part of the program, with the goal of putting the economy on a path of sustainable and balanced growth. Pakistan had previously been able to unlock $2 billion in IMF disbursements by making progress on its reform plan.
The current-account deficit was $9.0 billion from July to December 2021, according to the credit rating agency, compared to a surplus of $1.2 billion over the same period the previous year. According to IMF data, the quick widening of the current-account deficit resulted in a reduction in foreign-exchange reserves, which fell to $14.4 billion in November 2021 from $18.9 billion in July 2021. (see Exhibit 2). In December, Saudi Arabia (A1 stable) provided $3 billion in funding to Pakistan, boosting the latter’s foreign reserves to $16 billion.
Based on these data, Moody’s forecasts a current-account deficit of 3.0-3.5 percent of GDP in the fiscal year 2022. Following that, it anticipates global oil and commodity prices to moderate, limiting the increase of the import bill, while the global economic recovery continues to support exports and remittance inflows. The current-account deficit is expected to decrease and stabilize at 2% to 3% of GDP over the next two to three years, according to the model.
Beyond reserves, Moody’s noted that the IMF review’s completion and successful disbursement reflect recent and future developments in Pakistan’s institutions and governance strength. It also mentioned the IMF’s acknowledgment of Pakistan’s macroeconomic and fiscal management’s increased credibility.
The country’s recent measures to shore up fiscal finances, including significant modifications to the existing tax framework under the Finance (Supplementary) Bill 2021, have been complemented by more orthodox monetary policy. The enhancement of central bank autonomy through the State Bank of Pakistan (SBP) Amendment Bill 2021, according to Moody’s, will increase the SBP’s credibility in its ability to regulate inflation and limit direct financing of government debt. Further progress on tax reforms will almost certainly result in a steady increase in revenue, as well as an improvement in debt affordability.
“However, the IMF also noted the need for additional structural reforms, particularly in the energy and state-owned enterprise sectors, in order to foster a business environment that encourages investments and private sector development.” “Continued progress in these areas will not only boost economic productivity and competitiveness but will also reduce the sovereign’s contingent liability risks,” it added.
According to Moody’s, Pakistan is committed to advancing other reforms under the IMF program, which will likely result in additional disbursements. However, given that elections are expected for late 2023, the government’s ability to maintain reform momentum, particularly measures targeted at increasing its revenue base, or commit to a quick successor program beyond the program’s expiration in September 2022 is doubtful.