IMF loan will reduce Pakistan’s financing risks: Moody’s

KARACHI: The International Monetary Fund’s disbursement of $1.4 billion to Pakistan is expected to reduce the country’s financing risks, said Moody’s Investors Service in a new report released on Thursday.

The global rating agency’s research arm expects Pakistan’s real GDP to contract modestly anywhere between 0.1pc to 0.5pc in fiscal year 2020, with the economy gradually recovering to grow by more than 2pc in fiscal year 2021. This would be Pakistan’s first annual recession.

On 16th April, the IMF approved disbursement of $1.4 billion under its Rapid Financing Instrument (RFI). The financing supplements the assistance of $588 million committed by the Asian Development Bank and the International Development Association to support Pakistan’s response to the coronavirus outbreak. Additionally, G20 creditors also offered Pakistan bilateral debt relief.

The combined efforts will help reduce financing risks.

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“We expect that Pakistan’s financing needs will rise because of coronavirus-related economic effects and the government’s PKR1.2 trillion ($7 billion, 2.7pc of GDP) stimulus package, approved on 30 March,” said the authors of the report.

The agency expects the stimulus to widen the government deficit to between 9.5pc and 10pc of GDP in fiscal year 2020, from 8.9pc in fiscal year 2019. The deficit will reduce in fiscal year 2021, due to Pakistan’s commitment to fiscal consolidation under its IMF programme, to between 8pc and 8.5pc of GDP.

This is despite strong revenue growth, which helped narrow the deficit. The government’s revenue in the first half of this year rose almost 40pc from a year earlier, with tax revenue up by 18pc.

On a more positive note, some factors might help mitigate the effect of the contraction on the deficit, such as higher-than-budgeted central bank profits, lower-than-budgeted interest payments, and fiscal savings from lower oil prices.

The agency also said general government debt will rise to around 87pc of GDP by June 2020, from around 83pc in June 2019.

The report also noted G20’s recent offer of debt relief to low-income countries.

“Debt relief by official-sector creditors would provide additional but very modest spending capacity for Pakistan, whose interest payments on foreign-currency debt are around 0.6pc of GDP for fiscal 2021, with about one-third owed to bilateral creditors and another one-third owed to MDBs,” said the authors of the report.

Nationwide lockdowns from April 1 are expected to significantly curtail domestic spending. However, the government allowed labour-intensive industries such as agriculture, construction and textiles to resume operations on April 15, which should aid a gradual recovery in domestic consumption.

The report maintained that the central bank’s cumulative 425-bps policy rate cuts, as well as refinance schemes, should help buffer the economic shock.

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Meiryum Ali
The author is a member of the staff and can be reached at [email protected]
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