No-trust motion: Moody’s is concerned about Pakistan’s economy

• Moody's says no-confidence motion raises significant uncertainty over Pakistan govt’s capacity to commit to implementing reforms.
• Agency expresses concern that no-trust motion could be a hurdle in way of smooth reform process in Pakistan.
• "How Pakistan will approach the IMF programme from this point on is uncertain,” says Moody's.

The Moody’s Investor Service — a global credit rating agency — has raised concerns over Pakistan’s economy, terming the no-trust motion against Prime Minister Imran Khan “credit negative”.

In its commentary, the agency expressed concern that the no-confidence move could act as a hurdle in the way of a smooth reform process in Pakistan.

On March 28, the Opposition parties in Pakistan (B3 stable) tabled a no-confidence motion against Prime Minister Imran Khan, accusing him of mismanaging the economy.

“We view the no-confidence motion as credit negative because it raises significant uncertainty over policy continuity, as well as the government's ability to continue to implement reforms to increase productivity growth and secure external financing, including from the International Monetary Fund (IMF),” Moody’s said in a statement.

It noted that the no-confidence motion comes at a time when Pakistan is encumbered with surging inflation and widening current account deficits amid rising global commodity prices.

“A further deterioration in its external position, including a significant widening of the current account deficit and an erosion of foreign-exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks,” it stated, adding that Pakistan has faced significant pressure on its foreign-exchange reserves in recent months, amid elevated global commodity prices and a recovery in domestic demand.

Commenting on the Russia-Ukraine military conflict, which has driven up global commodity prices, Moody’s noted that the crisis has “amplified pressure on its [Pakistan] external position” as the country is a net oil importer, with petroleum and related products accounting for about 20% of total imports.

The credit rating agency further noted that Pakistan's current account deficit amounted to more than $12 billion between July 2021 and February 2022, a stark contrast to a $1 billion surplus in the same period a year earlier.

“We now expect the deficit to widen to 5-6% of GDP in fiscal 2022 (ending June 2022) compared with our previous forecast of 4%,” Moody’s mentioned, adding that this further widening will put “greater pressure” on Pakistan’s foreign reserves, which declined to $14.9 billion as of February 2022 from $18.9 billion in July 2021, according to IMF data, sufficient to cover only around two months of imports.

Meanwhile, securing external financing, including from the IMF, will be key for Pakistan to continue to meet its external obligations given the pressures on its foreign-exchange reserves.

“However, the no-confidence motion raises significant uncertainty over the government’s capacity to commit to implementing reforms, particularly those aimed at broadening the revenue base,” the agency warned.

Moody’s further stated that how Pakistan will approach the IMF programme from this point on is “uncertain, and its participants could be in doubt.”

Pakistan is undergoing its seventh review under the IMF’s Extended Fund Facility programme, which has disbursed $3 billion out of the stipulated $6 billion to date. However, discussions between Pakistan and the IMF appear to have stalled since early March, with the IMF expressing concerns over the government’s recent relief package in response to rising inflation.

It is worth mentioning that relief measures have included subsidies on fuel and electricity prices, as well as a tax amnesty for specified sectors.

“Regardless of the outcome of the no-confidence vote, the ruling party will find it difficult to balance advancing revenue-raising reforms to secure external financing and political pressure from voters facing rising living costs,” the agency said.