Moody’s, a credit rating agency has raised concerns over the no-confidence motion tabled by the opposition parties in Pakistan against Prime Minister Imran Khan, saying that it would put significant pressure on the country’s economy.
“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),” Moody’s said in a statement. Khan’s ruling Pakistan Tehreek-e-Insaf party officially controls 155 seats out of 342 in the National Assembly (lower house of parliament) and has a majority of 179 once allied regional parties are included.
The motion comes at a time when Pakistan is encumbered with surging inflation and widening current account deficits amid rising global commodity prices. A further deterioration in its external position, including a significant widening of the current account deficit and erosion of foreign-exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks.
Pakistan has faced significant pressure on its foreign-exchange reserves in recent months, amid elevated global commodity prices and a recovery in domestic demand. The Russia-Ukraine military conflict, which has driven up global commodity prices, has amplified pressure on its external position. The country is a net oil importer, with petroleum and related products accounting for about 20% of total imports. 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 with our previous forecast of 4%,” it added. Moody’s said this further widening would 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.
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. 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. However, discussions between Pakistan and the IMF appear to have stalled since early March, with the IMF expressing concerns over the government’s recent relief package in response to rising inflation. Relief measures have included subsidies on fuel and electricity prices, as well as a tax amnesty for specified sectors.
Regardless of the outcome 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, it added.
The Moody’s Investor Service has termed the no-confidence motion against Prime Minister Imran Khan credit negative and expressed concern that it could act as a hurdle in way of the smooth reform process in Pakistan.
“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 rating agency stated in a report on Thursday. “The motion comes at a time when Pakistan is encumbered with surging inflation and widening current account deficits amid rising global commodity prices.” A further deterioration in Pakistan’s external position, including significant widening of the current account deficit and erosion of foreign exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks, it cautioned.
