Pakistan Faces Risk of Default Without IMF Bailout, Warns Moody’s

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Moody’s Investors Service, a leading financial ratings company, has issued a warning that Pakistan may default on its debts if it does not receive an International Monetary Fund (IMF) bailout. This comes as Pakistan faces uncertain financing options beyond June, with very weak reserves that could lead to a default. Grace Lim, a sovereign analyst with Moody’s in Singapore, stated that “without an IMF programme, Pakistan could default given its very weak reserves.” The situation is precarious, and Pakistan urgently needs the necessary funding to avoid a financial crisis. 

Pakistan has been working closely with the IMF to resume its bailout programme, which has been stalled at the ninth review since November last year. Despite various measures, including a floating exchange rate, additional taxes, and hikes in energy tariffs, the IMF has not been convinced to resume the bailout. Instead, the IMF has reiterated that it is working with Pakistani authorities to bring the pending ninth review to a conclusion “once the necessary financing is in place and the agreement is finalized.” 

Pakistan has secured nearly half of its necessary financing after its officials said that Saudi Arabia and UAE have pledged to provide a combined $3 billion. However, the amounts are yet to be deposited in the country’s central bank, and its official foreign exchange reserves still stand at a precarious level. 

According to S&P Global Ratings, Pakistan’s gross external financing needs as a proportion of current-account receipts plus usable reserves is estimated to rise to 139.5% in the fiscal year 2024 from 133% in 2023. This reflects the state of the economy that has also had to bear major political turmoil and frequent changes in key leadership. 

Read More: World Bank cuts GDP growth to 2% and Moody’s downgrades Pakistan’s rating to CAA1

Moody’s considers the IMF program to be a foundation for important fiscal policy reforms. Andrew Wood, a sovereign analyst at S&P in Singapore, was quoted as saying by Bloomberg that “agreement on the current review cycle could also coalesce more confidence for other bilateral and multilateral lenders to Pakistan.” Therefore, engagement with the IMF beyond June would support additional financing from other multilateral and bilateral partners, reducing default risk. 

The delay in resuming the IMF bailout programme is costing Pakistan dearly in the shape of economic and reputational loss to the government. Finance Minister Ishaq Dar held a virtual meeting with IMF Executive Director Bahador Bijani on Monday, seeking his support to persuade the IMF management to sign a staff-level agreement with Pakistan, according to sources in the Ministry of Finance. 

In conclusion, the situation in Pakistan is challenging, and the government urgently needs to secure the necessary funding to avoid a financial crisis. The IMF bailout programme is viewed as critical for fiscal policy reforms, and an engagement with the IMF beyond June would support additional financing from other multilateral and bilateral partners, reducing default risk. Therefore, it is vital that Pakistan and the IMF work together to finalize the agreement and avoid a default on its debts. 

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