The fragile path of economic reforms
Moody’s recent analysis casts a spotlight on Pakistan’s delicate economic situation, highlighting the intricate challenges posed by the new agreement with the International Monetary Fund (IMF). While the deal offers a financial lifeline, the real test lies in the government’s ability to implement and sustain crucial reforms amidst socio-political turmoil.
The global rating agency articulated that Pakistan’s staff-level concurrence with the International Monetary Fund (IMF) “enhances funding prospects, though the capacity to sustain reforms is pivotal for mitigating liquidity risks.” The administration led by Shehbaz Sharif, alongside the IMF, concluded a triennial, $7 billion aid arrangement, as disclosed by the Washington-based institution, providing the beleaguered nation a much-needed reprieve.
In its commentary on the new agreement with the IMF, Moody’s remarked, “the new IMF programme will bolster Pakistan’s (Caa3 stable) funding prospects.”
“The programme will furnish credible financing avenues from the IMF and act as a catalyst for funds from other bilateral and multilateral partners to address Pakistan’s external financing exigencies.”
Nevertheless, the agency underscored that the government’s proficiency in maintaining reform execution is crucial for Pakistan to consistently unlock financing throughout the IMF programme, consequently leading to a sustained alleviation of governmental liquidity risks.
Addressing the stipulations of the new programme, Moody’s highlighted that it “entails comprehensive reforms, such as measures to expand the tax base, eliminating exemptions, and making timely adjustments to energy tariffs to restore the energy sector’s viability,” among other measures aimed at enhancing state-owned entities’ (SOE) management and privatization, phasing out agricultural support prices and associated subsidies, and progressively liberalizing trade policy.
However, the agency conceded that social unrest, driven by high living costs, could impede reform implementation, particularly due to increased taxes and future adjustments to energy tariffs.
“Moreover, there are risks that the coalition government may lack a sufficiently robust electoral mandate to perpetually implement arduous reforms,” it stated in the commentary.
As reported by the IMF in May, the nation’s “external financing needs amount to approximately $21 billion” for the year concluding in June 2025, and around $23 billion for the fiscal year 2026-27. Moody’s noted that the foreign reserves held by the country are currently “substantially below its requirements.”
The agency indicated that Pakistan was vulnerable to “policy deviations,” adding that weak governance and high social tensions could exacerbate the government’s ability to advance reforms. The prominent rating agency has highlighted some, though not all, of the obstacles on the protracted path of the new EFF (Extended Fund Facility). Moody’s does not doubt that the SLA (Staff-Level Agreement) reached with the IMF will be ratified by its executive board, and acknowledges that it will “enhance Pakistan’s funding prospects,” yet cautions that the stringent “upfront conditions” might require more fortitude than a fragile government can muster, thereby dampening the recent euphoria.
Moody’s observation is notably pertinent. It omits the recent government decision to avoid generating critical fiscal space by taxing the most significant, protected entities, thereby shifting the increased burden onto middle- and lower-income groups.
However, it emphasizes that these “upfront conditions” – particularly structural reforms – will become more challenging as the Facility progresses, and it questions whether a fragile coalition government, still grappling for legitimacy months after a highly contested election result, can enforce them on a populace already suffering from record inflation and unemployment over the past three years.
Social unrest, potentially even rioting, is almost inevitable and could force the programme to be abandoned midway, as has frequently occurred in our prolonged history with the Fund. What would our position be then?
According to the IMF, Pakistan’s external financing needs are $21 billion for this fiscal year and an additional $23 billion for 2025-26, while current reserves stand at only $9.4 billion. These repayments will be possible only if we remain under an active IMF programme. If it is terminated due to social unrest or weak revenue collection, the country will almost certainly default. It’s that straightforward.
Interestingly, the report appears to overlook the burgeoning insurgency and its substantial costs. Foreign investors and bi- and multilateral creditors might extend their sympathies, but not their investments, as casualties rise, insecurity persists, and the risk of their funds being lost to another war-on-terror scenario increases.
The crucial question now is whether the government can persuade the populace to endure unprecedented and discriminatory tax burdens – mainly because it continues to shield the major sectors with the influence to avoid the tax net – long enough for the EFF to complete and delay default that much longer.
Moody’s seems skeptical. Millions of citizens will likely share this skepticism when tax hikes inflate their bills beyond their total incomes. This is when the government will need to demonstrate its resolve.
How it manages the economy, the insurgency, and perhaps the most intense political divide in the country’s history will soon be under intense scrutiny.
Thus far, the administration’s lack of seriousness regarding equitable taxation and inaction on the SOE front indicate, if anything, that it does not fully comprehend the severity of the situation.
The road ahead for Pakistan is fraught with uncertainty. Moody’s skepticism underscores the monumental challenge facing the government: to enforce stringent reforms in a nation already beset by economic hardship and political instability. The success of the IMF programme hinges on the administration’s capacity to navigate these turbulent waters and maintain public support. Failure to do so could precipitate a financial default, exacerbating the very crises the programme aims to resolve. The coming months will reveal whether the government can rise to the occasion or if history will repeat itself with yet another abandoned reform effort.