Moody’s recent evaluation of Pakistan’s economic outlook has raised concerns amid ongoing political uncertainties and the challenges posed by inconclusive elections. The potential impact on the formation of a coalition government, coupled with macroeconomic pressures, has prompted reflections on the nation’s ability to negotiate a new IMF program.

Moody’s Investors Service indicates that Pakistan’s credit rating outlook is uncertain due to the political instability resulting from inconclusive elections, leaving no party with a clear majority. The rating agency expresses concern about the ongoing negotiations for a coalition government, highlighting potential challenges for policy-making and reforms, especially amid significant macroeconomic pressures.

According to Moody’s analysts, led by Grace Lim, prolonged delays in forming a coalition government could heighten political and policy uncertainties at a crucial time for Pakistan, given its precarious macroeconomic situation. The agency, which currently rates Pakistan at Caa3 with a negative outlook, suggests that a coalition government may lack unity and political strength, making it difficult to achieve consensus on essential reforms, including measures to increase revenue. It warns of possible public protests that may question the legitimacy of the new government, potentially leading to social unrest and instability. The agency emphasizes that social tensions could impede the government’s ability to undertake necessary reforms. Pakistan’s economy is already grappling with challenges such as a widening current account deficit, diminishing foreign exchange reserves, currency depreciation, and rising inflation. In light of these issues, there is an anticipation that Pakistan will seek another bailout from the International Monetary Fund (IMF) after the current arrangement expires in March-April to avert a balance of payments crisis.

The agency underscores the uncertainty surrounding Pakistan’s ability to swiftly negotiate a new IMF program and emphasizes that the government’s liquidity and external vulnerability risks will persist until there is clarity on a credible longer-term financing plan. The assessment is the first international commentary on Pakistan’s post-election scenario, acknowledging ongoing negotiations for a coalition government. However, Moody’s remains cautious, noting that even if a multiparty coalition government is formed, it may lack unity and political strength, posing challenges to implementing essential reforms. This perspective contrasts with the confidence expressed by the Special Investment Facilitation Council (SIFC), which, with federal and provincial members, has demonstrated the capacity to fulfill challenging commitments to the IMF under the ongoing Strand-By Arrangement (SBA). Despite potential skepticism, the SIFC’s effectiveness is credited with decisions that, though seemingly taken by the caretaker cabinet, would not have been possible without full support from SIFC members.

The assertion that the “overall uncertainty around Pakistan’s ability to quickly negotiate a new IMF programme after the current one expires in April 2024 remains very high” has historically played a role in easing the process of securing an IMF program loan, a situation that existed prior to the establishment of the Special Investment Facilitation Council (SIFC) in late June 2023. The concerns about the potential for public protests challenging the legitimacy of the new government and the resulting increase in social tensions, which could hinder the government’s reform efforts, are acknowledged. The sustained high rates of inflation, reaching around 30 percent per month over the past year and a half, have been fueled by an unexplained surge in domestic borrowing by the caretaker government.

Pre-existing public discontent with poverty levels as high as 40 percent was evident before the elections, albeit without strong political backing. However, if protests become more organized under a political banner, Moody’s warnings may warrant closer attention.

Former Finance Minister Ishaq Dar contested Moody’s rating downgrade on October 6, 2022, the same day he announced an unbudgeted 110 billion rupees subsidy for exporters, violating the ongoing IMF program. It’s noteworthy that neither Moody’s nor the other two international rating agencies, Fitch and Standard & Poor’s, have upgraded Pakistan’s rating since then. This lack of upgrade is cited as the reason why the $6.1 billion budgeted by Dar for the ongoing year under external commercial bank borrowing and debt equity (issuance of Sukuk/Eurobonds) has not materialized to date.

Despite the caretaker finance minister celebrating the successful first review staff level agreement reached on November 15, it did not prompt an upgrade from the rating agencies, contrary to past practices. While the SIFC has demonstrated its capacity to implement politically challenging revenue measures, it falls short of influencing the administration to reduce, rather than increase, the budgeted current expenditure. Furthermore, the SIFC lacks control over the country’s rating by international agencies, influencing the rate of return charged by foreign commercial banks and the Eurobond/Sukuk international market.

As Pakistan grapples with economic complexities, Moody’s cautionary stance on the uncertainties surrounding the IMF negotiations underscores the need for strategic and decisive actions. The SIFC’s demonstrated capacity for implementing revenue measures is commendable, yet challenges persist, including the unaddressed rise in domestic borrowing. The absence of an upgrade from international rating agencies further compounds the economic landscape. Balancing political and economic imperatives will be crucial for the new government, requiring a comprehensive approach to address both Moody’s concerns and domestic discontent.