Moody’s: No Confidence Motion Will Exacerbate Policy Uncertainty

ISLAMABAD: A no-confidence move against Prime Minister Imran Khan, according to Moody’s Investors Service, would heighten policy uncertainty amid growing inflation, a widening current account deficit, and dwindling foreign exchange reserves.
Given the linked policy and decision-making vacuum, the New York-based credit rating service dubbed the scenario “a credit negative.” “We see the no-confidence motion as a credit negative since it casts doubt on the government’s capacity to maintain policy continuity and receive external finance, especially from the International Monetary Fund (IMF).”
Moody’s said in a statement that the vote of no confidence came at a time when Pakistan was grappling with growing inflation and widening current account deficits because of rising global commodity costs.

“A further worsening in the government’s external position, particularly a considerable widening of the current account deficit and eroding foreign-exchange reserves, would jeopardise the government’s external repayment capability and increase liquidity concerns,” it said.

Pakistan’s foreign exchange reserves have been under severe strain in recent months as global commodities prices have risen and local demand has improved. The armed war between Russia and Ukraine, which has pushed up global commodity prices, has increased pressure on Russia’s external position. Petroleum and allied goods account for around 20% of total imports, making the country a net oil importer.

Between July 2021 and February 2022, Pakistan’s current account deficit grew to more than $12 billion, compared to a $1 billion surplus a year earlier. “In fiscal 2022 (ending June 2022), we now estimate the deficit to widen to 5-6 percent of GDP, up from our earlier prediction of 4 percent,” Moody’s stated.

This widening strain would put more pressure on Pakistan’s foreign reserves, which have fallen to $14.9 billion in February 2022 from $18.9 billion in July 2021, according to IMF statistics, and are only enough to cover around two months of imports.

“Given the strains on Pakistan’s foreign-exchange reserves, securing external funding, especially from the IMF, would be critical for Pakistan to continue to pay its external obligations,” the rating agency stated.

It said that the “no-confidence vote casts serious doubt on the government’s ability to adhere to reforms, notably those targeted at increasing the tax base.” “It’s unclear how Pakistan would handle the IMF programme from here on out, and its membership might be in jeopardy.”

Pakistan is undergoing its sixth review under the International Monetary Fund’s Extended Fund Facility programme, which has so far disbursed $3 billion out of a total of $6 billion. However, talks between Pakistan and the IMF appear to have stopped since early March, with the Fund voicing reservations over the government’s latest inflation alleviation plan. Subsidies on gasoline and power costs, as well as a tax amnesty for certain industries, were among the relief measures.

Regardless of the outcome of the no-confidence vote, Moody’s predicts that the ruling party will struggle to strike a compromise between pushing revenue-raising policies to secure external finance and political pressure from people concerned about growing living costs.