ISLAMABAD: International credit agency Moody’s on Thursday downgraded Pakistan’s outlook from stable to negative, citing a “heightened external vulnerability risk” and the inability to secure additional external financing.
Pakistan has been grappling with an economic crisis spurred by dwindling foreign exchange reserves, a volatile currency and its inability to unlock funding from the IMF and other multilateral donors.
Last week’s talks between Pakistan and the IMF to resume a $6bn loan program were inconclusive, with the lender setting the condition that Islamabad roll back fuel and power subsidies introduced by the last government that have blown a hole in public finances.
“The decision to change the outlook to negative is driven by Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing to meet its needs,” Moody’s said in a statement.
The credit agency added that surging inflation had increased Pakistan’s external vulnerability risk and put a strain on its already-thin foreign exchange reserves, the current account and local currency.
“Pakistan’s weak institutions and governance strength adds uncertainty around the future direction of macroeconomic policy,” Moody’s said. “Including whether the country will complete the current IMF Extended Fund Facility (EFF) program and maintain a credible policy path that supports further financing.”
Moody’s said notwithstanding the risks mentioned, the credit agency expected Pakistan to successfully conclude the seventh IMF review and secure funding from the international money lender which would unlock financing from other bilateral and multilateral partners.
“In this case, Moody’s assesses that Pakistan will be able to close its financing gap for the next couple of years,” it said.
It added that while the government’s recent decision to hike prices of petroleum products showed it was willing to address the IMF’s concerns, social and political challenges in Pakistan would make it difficult for the government to bring about revenue-raising reforms.
The rating agency also warned of a “balance-of-payment crisis” if Pakistan was unable to secure external financing later this year.
“If Pakistan is unable to secure additional financing later this year, foreign exchange reserves will continue to be drawn down from already very low levels, increasing the risk of a balance of payments crisis,” it said.
