Moody’s warns of liquidity risks for Pakistan despite IMF agreement

Moody's Ratings said on Tuesday that the new International Monetary Fund (IMF) deal will open financing avenues for Pakistan, but liquidity risks remain if the reforms are not implemented stringently and failure to do so could send the country back to the lender of last resort.

The IMF and Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility Arrangement (EFF) of about $7 billion. The agreement, inked on July 12, is subject to approval by the IMF Executive Board, although no date has been set for a vote.

“If approved, which we expect is likely, the new IMF programme will improve Pakistan's (Caa3 stable) funding prospects,” the Moody’s said in its latest report.

It said the programme would provide credible sources of financing from the IMF and catalyse funding from other bilateral and multilateral partners to meet Pakistan's external financing needs.

“However, the government’s ability to sustain reform implementation will be key to allowing Pakistan to continually unlock financing over the duration of the IMF programme, leading to a durable easing of government liquidity risks."

However, the rating agency warned that a resurgence of social tensions on the back of high cost of living — which may increase because of higher taxes and future adjustments to energy tariffs — could weigh on reform implementation.

The new IMF EFF comes with conditions of far-reaching reforms, such as measures to broaden the tax base and removing exemptions and making timely adjustments of energy tariffs to restore the energy sector viability, the financial services company said.

“Other measures include improving state-owned enterprises' management and privatisation, phasing out agricultural support prices and associated subsidies, advancing anti-corruption, governance and transparency reforms, and gradually liberalising trade policy.”

Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain, it added.

According to an IMF report published in May, Pakistan’s external financing need is about $21 billion for fiscal year 2024-25 (ending June 2025) and about $23 billion for fiscal 2026-27. Pakistan’s foreign exchange reserves of $9.4 billion as of July 5 are well below its needs.

The country’s external position remains fragile, with high external financing requirements over the next three to five years and its economy is vulnerable to policy slippages, as per Moody’s.

“Weak governance and high social tensions can compound the government’s ability to advance reforms, jeopardising its ability to complete reviews under the IMF programme and unlock external financing,” it added.