Moody’s doubts success of IMF loan

Moody’s Ratings anticipates that the International Monetary Fund (IMF) Executive Board will approve the $7 billion loan programme for Pakistan, but is doubtful about whether the country will complete the 37-month Extended Fund Facility (EFF), which includes tough structural reforms amid a politically weak government.

In its commentary titled “Government of Pakistan – IMF’s Staff-Level Agreement Improves Funding Prospects, but Ability to Sustain Reforms Key to Easing Liquidity Risks,” the global rating agency noted that the IMF and Pakistani authorities reached a staff-level agreement (SLA) on a 37-month EFF of about $7 billion on July 12, 2024.

“If approved, ‘which we expect is likely’, the new IMF programme will improve Pakistan’s (Caa3 stable) funding prospects. The programme will provide credible sources of financing from the IMF and catalyse funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs.”

However, the agency highlighted that Pakistan’s external position remains fragile, with high external financing requirements over the next three to five years. “The country is vulnerable to policy slippages. Weak governance and high social tensions can compound the government’s ability to advance reforms, jeopardising its ability to complete reviews under the IMF programme and unlock external financing.”

According to an IMF report published in May, Pakistan’s external financing needs are about $21 billion for fiscal 2025 (ending June 2025) and about $23 billion for fiscal 2026-27. Pakistan’s foreign exchange reserves of $9.4 billion as of July 5, 2024, are well below its needs.

The new IMF EFF comes with conditions for far-reaching reforms, such as measures to broaden the tax base, remove exemptions, and make timely adjustments to energy tariffs to restore the energy sector’s viability. Other measures include improving the management and privatisation of state-owned enterprises, phasing out agricultural support prices and associated subsidies, advancing anti-corruption, governance, and transparency reforms, and gradually liberalising trade policy.

Moody’s stated that the government’s ability to sustain reform implementation will be key to allowing Pakistan to continually unlock financing over the duration of the IMF programme, leading to a durable easing of government liquidity risks.

A resurgence of social tensions due to the high cost of living—which may increase because of higher taxes and future adjustments to energy tariffs—could weigh on reform implementation. Moreover, the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms.

It is noted that Pakistan has a long history of entering IMF loan programmes, including EFFs, but failing to complete most of them amid tough conditions and weak political capacity. The latest EFF, pending IMF Executive Board approval, is the 24th loan programme in Pakistan’s 77-year history.

Muhammad Sohail, CEO of Topline Securities, noted in a short commentary that the current 37-month package worth $7 billion is the fourth EFF since 2001. Pakistan completed the first two EFFs during 2001-2004 and 2013-2016, which supported positive economic growth. However, the country failed to complete the third EFF during 2019-2022 and suffered economically.

Topline Research expressed hope that Pakistan will comply with IMF conditions attached to the new EFF (2024-2027) and help achieve “moderate economic recovery” after several years of slowdown and high inflation.

Although there is no set date for IMF Executive Board consideration for the expected final approval of the programme for Pakistan, the research house said the board approval normally takes a couple of weeks after the SLA.

Topline Research also mentioned that the government is planning to augment the size of the package by including a Climate Facility in the first review of the new IMF programme. “We believe, if this happens, the minimum size of the climate facility would be 1 billion SDR, equivalent to $1.4 billion. This will be another boost to Pakistan’s external position,” Topline said.

The new programme aims to strengthen macroeconomic stability and set the path for resilient and inclusive growth.

Sana Tawfik, an economist at Arif Habib Limited, said in a video message that the new IMF loan programme would help strengthen the economic stability achieved during the nine-month short Standby Arrangement worth $3 billion completed in April 2024. The new programme will ensure continuity in the repayment of external debt and provide the cover to ramp up economic activities during the 37-month course of the programme, she said.