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Moody’s warns of ‘highly uncertain’ external funding prospects for Pakistan

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  • Agency says FY24 budget lacks revenue-raising measures.
  • Pakistan’s future of new programme to become clear after elections.
  • “Negotiations for future deal will also take some time,” it says.

KARACHI: Moody’s Investors Service has warned that Pakistan’s ability to secure loans from bilateral and multilateral partners will be severely constrained until a new programme is negotiated with the International Monetary Fund (IMF).

The credit company, in an issuer comment report, said: “Whether Pakistan will join another IMF programme may only become clear after elections, which are due by October 2023. Negotiations for any future IMF programme would also take some time, even if they succeed.”

It further warned that Pakistan is unlikely to access market financing at affordable costs, either from Eurobonds or commercial banks, in the foreseeable future. 

In fiscal 2023, the government issued no Eurobonds and raised only Rs521 billion ($2.8 billion) from commercial banks, far short of the Rs1.4 trillion target set in the fiscal year 2022-23 budget.

The country’s external debt repayment will remain high for the next few years, with about $25 billion of repayments (principal and interest) due in fiscal 2024, while foreign exchange reserves are very low at $3.9 billion as of June 2.

“Pakistan’s external funding prospects for fiscal 2024 and later are highly uncertain,” Moody’s said. “It is not guaranteed that Pakistan will be able to secure $2.4 billion from the IMF as budgeted.”

The IMF has been in talks with Pakistan on the ninth tranche of a $6.5 billion bailout package since last year. The programme will expire at the end of June.

Moody’s said the government is considering rescheduling bilateral debts, but it does not plan to approach the Paris Club or multilateral partners to reschedule their debt.

“Under our definition, a suspension of debt service obligations only to official creditors is unlikely to have direct rating implications,” the rating agency said. “Indeed, such relief would increase the government’s available fiscal resources for essential health, social and infrastructure spending.”

Moody’s said Pakistan’s newly announced budget for the fiscal year 2023-24 lacks major revenue-raising or spending-containment measures to alleviate intense government liquidity pressures.

The rating agency said it considers the deficit estimates and growth projections to be optimistic, given the stresses the economy is facing, in particular government liquidity and external vulnerability pressures, exacerbated by the severe floods of August 2022 that will continue to weigh on economic activity over fiscal 2024. 

“At the same time, the budget does not contain significant revenue-raising or spending-containment measures,” Moody’s said.

“The budget provides a wide range of relief measures for households and businesses, including a reduction in fuel and electricity prices, an increase in the minimum wage, and a one-time cash transfer to low-income households.”

A large share of the increase in expenditure goes towards salaries and pensions for government employees. Total employee-related expenses are budgeted at Rs1.2 trillion, compared with the estimated spending of Rs960 billion in fiscal 2023.

In addition, the government earmarked Rs2.8 trillion for grants and subsidies in fiscal 2024, compared with an estimated Rs2 trillion in fiscal 2023.

However, Pakistan’s low revenue/GDP ratio is a major constraint on the government’s debt affordability and debt burden.

The budget targets fiscal 2024 tax revenue at Rs9.2 trillion, up 28% from an estimated Rs7.2 trillion in fiscal 2023.

“Given a lack of new significant revenue-raising measures, the government’s revenue projections rely mainly on the assumption that nominal GDP growth will be high and support an increase in revenue. In the current context, we see significant downside risks to that assumption.”

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With its second-largest surge ever, PSX approaches 114,000 points.

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Driven by renewed activity from both private and government financial institutions, the Pakistan Stock Exchange (PSX) saw its second-largest rally in history on Monday.

The market regained many important levels in a single trading session as it rose with previously unheard-of momentum.

Intraday trading saw a top increase of 4,676 points, and the PSX’s benchmark KSE-100 Index gained 4,411 points to settle at 113,924 points. This impressive rebound demonstrated significant investor confidence by reestablishing the 100,000, 111,000, 112,000, and 113,000-point levels.

The market also saw the 114,000-point limit reestablished during the trading session.

The positive tendency was reflected when the market’s heavyweight shares touched its upper circuits. Among the most busiest trading sessions in recent memory, an astounding 85.78 billion shares worth a total of Rs55 billion were exchanged.

Experts credited the spike to heightened institutional investor activity and hope for macroeconomic recovery. Considered a major market recovery, the rally demonstrated the market’s tenacity and development potential.

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In interbank trade, the Pakistani rupee beats the US dollar.

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In the international exchange market, the US dollar has continued to weaken in relation to the Pakistani rupee.

The dollar fell to Rs278.10 from Rs278.17 at the beginning of interbank trading, according to currency dealers, a seven paisa loss.

In the meantime, there was a lot of turbulence in the stock market, but it recovered and moved into the positive zone. The KSE-100 index recovered momentum and reached 116,000 points after soaring 1,300 points.

Both currency and stock market swings, according to analysts, are a reflection of ongoing market adjustments and economic uncertainty.

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Phase II of CPEC: China-Pakistan Partnership Enters a New Era

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The cornerstone of economic cooperation between the two brothers and all-weather friends is still the China-Pakistan Economic Corridor, the initiative’s flagship project.

In contrast to reports of a slowdown, recent events indicate a renewed vigour and strategic emphasis on pushing the second phase of CPEC, known as CPEC Phase-2, according to the Ministry of Planning, Development, and Special Initiatives.

According to the statement, this crucial stage seeks to reshape the foundation of bilateral ties via increased cooperation, cutting-edge technology transfer, and revolutionary socioeconomic initiatives.

Planning Minister Ahsan Iqbal is leading Pakistan’s participation in a number of high-profile gatherings in China, such as the 3rd Forum on China-Indian Ocean Region Development Cooperation in Kunming and the High-Level Seminar on CPEC-2 in Beijing.

His involvement demonstrates Pakistan’s commitment to reviving CPEC, resolving outstanding concerns, and developing a strong phase-2 roadmap that considers both countries’ long-term prosperity.

At the core of these interactions is China’s steadfast determination to turn CPEC into a strategic alliance that promotes development, progress, and connectivity.

Instead of being marginalised, CPEC is developing into a multifaceted framework with five main thematic corridors: the Opening-Up/Regional Connectivity Corridor, the Innovation Corridor, the Green Corridor, the Growth Corridor, and the Livelihood-Enhancing Corridor.

With the help of projects like these, the two countries will fortify their partnership, and CPEC phase-2 will become a model of global economic integration and collaboration that benefits not just China and Pakistan but the entire region.

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