In the aftermath of inconclusive elections that failed to produce a clear majority for any political party, Moody’s Investors Service has highlighted the clouded credit rating outlook for Pakistan due to the ensuing political uncertainty.
The rating agency expressed concerns about the potential challenges posed by the ongoing negotiations to form a coalition government, emphasizing the need for timely decision-making in the face of significant macroeconomic pressures.
Moody’s analysts, including Grace Lim, emphasized in a note, “While negotiations between parties to form a coalition government are currently underway, prolonged delays will raise political and policy uncertainties at a time when Pakistan faces significant macroeconomic challenges, particularly its very weak external and liquidity position.”
Pakistan, currently rated at Caa3 with a negative outlook by Moody’s, is grappling with the prospect of a coalition government that may lack unity and political strength. The agency warned that such a government could face difficulties in achieving consensus on crucial reforms, including revenue-raising measures, essential for stabilizing the country’s economic condition.
The rating agency also underscored the risk of public protests challenging the legitimacy of the new government, potentially leading to social unrest. Moody’s analysts cautioned that these social tensions could further constrain the government’s ability to implement essential reforms, exacerbating the economic challenges already faced by the nation.
Pakistan’s economy has been under strain due to a widening current account deficit, falling foreign exchange reserves, a depreciating currency, and rising inflation. The country is anticipated to seek another bailout from the International Monetary Fund (IMF) as the current one is set to expire in March-April, aiming to avert a balance of payments crisis.
Moody’s statement highlighted the uncertainty surrounding Pakistan’s ability to swiftly negotiate a new IMF program after the expiration of the current one in April 2024. The agency stressed that Pakistan’s government liquidity and external vulnerability risks would remain elevated until a credible longer-term financing plan is in place.
With an external financing requirement of $24.5 billion for the fiscal year ending June 2024, of which $5 billion is net payable, Pakistan faces a substantial challenge in managing its financial obligations. While most repayments for the current year have been paid or rolled over, the central bank estimates further rollovers worth $5 billion in the ongoing fiscal year.
The clouded credit rating outlook for Pakistan underscores the urgent need for a stable and effective government that can navigate the complex economic landscape and implement necessary reforms to restore confidence among investors and international financial institutions. As the coalition government negotiations continue, the nation’s economic fate remains uncertain, casting a shadow on its creditworthiness in the eyes of global financial markets.
