ISLAMABAD: Moody’s, a New York-based global credit rating agency, has downgraded Pakistan’s foreign currency issuer and debt ratings to Caa3 from Caa1, the agency said on Tuesday, concurrently changing the South Asian economy’s outlook to “stable” from negative. 

The decision to downgrade the ratings is driven by Moody’s assessment that Pakistan’s increasingly fragile liquidity and external position significantly raises default risks, according to Moody’s. 

In particular, the country’s foreign exchange reserves have fallen to extremely low levels, $3.2 billion, far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term. 

“Although the government is implementing some tax measures to meet the conditions of the IMF program and a disbursement by the IMF may help to cover the country’s immediate needs, weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments,” Moody’s said. 

The cash-strapped South Asian country is struggling to secure a crucial $1.2 billion loan tranche from the International Monetary Fund (IMF) to keep the economy afloat, amid currency depreciation and multi-decade high inflation. 

The loan tranche, stalled since late last year, is part of Pakistan’s $7 billion bailout program that the country secured in 2019. 

The stable outlook reflects Moody’s assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks. 

“Significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF program and related financing, would reduce default risk potentially to a level consistent with a higher rating,” the rating agency said. 

“However, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default. Moreover, beyond the life of the current IMF program that ends in June 2023, there is very limited visibility on Pakistan’s sources of financing for its sizeable external payments needs.” 

Earlier this month, Moody’s said Pakistan’s external position was in significant stress after negotiations between the government and a visiting IMF mission remained inconclusive despite 10 days of talks in Islamabad. 

Shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate held up a 9th review of Pakistan’s IMF program, which was originally due in November. 

However, Pakistani authorities appear close to an agreement on the 9th review and have already taken fiscal actions, including an apparent removal of a cap on the rupee exchange rate and an increase in energy prices, to facilitate the bailout deal.