Islamabad, July 16, 2024 – Pakistan’s economic outlook has received a cautious boost with the recent staff-level agreement reached with the International Monetary Fund (IMF) for a new $7 billion Extended Fund Facility (EFF). While this agreement offers a crucial source of financing, Moody’s Ratings Agency warns that Pakistan’s ability to sustain reforms will be the ultimate determinant of its success.
Unlocking Funding Requires Sustained Commitment
The new program provides much-needed resources from the IMF and is expected to catalyze additional funding from other bilateral and multilateral partners. However, Moody’s emphasizes that Pakistan must maintain its commitment to reform throughout the three-year program to ensure continued access to these funds and ultimately improve its economic health.
Conditions for Success: Broadening the Tax Base and More
The IMF program hinges on Pakistan implementing significant reforms, including broadening the tax base by eliminating exemptions, adjusting energy tariffs to ensure sector viability, and improving the management and privatization of state-owned enterprises. Additionally, phasing out agricultural subsidies, strengthening anti-corruption measures, and liberalizing trade policies are all crucial components of the program.
Social Tensions and Political Will: Potential Roadblocks
A rise in social tensions due to higher living costs, potentially exacerbated by tax increases and energy price adjustments, could hinder the government’s ability to implement reforms. Furthermore, concerns linger over the coalition government’s ability to maintain the political will necessary to carry through these challenging measures.
External Financing Needs Remain High
Pakistan faces a significant challenge in meeting its external financing needs, estimated at $21 billion for the current fiscal year and $23 billion for the following two years. With foreign exchange reserves hovering around $9.4 billion, the need for a successful IMF program is paramount.
Fragile Economic Landscape Demands Continued Improvement
Moody’s maintains that Pakistan’s external position remains fragile. The country’s success hinges on its ability to avoid policy slippages and address issues related to weak governance and social tensions. These factors could potentially derail program completion and critically limit access to external financing.
Looking Ahead: Hope for Upgrade Hinges on Reform
While the recent IMF agreement is a positive step, it serves as a starting point rather than a guaranteed solution. Pakistan’s credit rating upgrade, which the country has been actively pursuing, remains contingent on a demonstrably stronger and more sustainable economic position. Only through sustained commitment to reform and a demonstrably improved fiscal health can Pakistan secure the brighter economic future it seeks.