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Pakistan could default without IMF funds, Moody’s warns

According to a Tuesday warning from Moody’s Investor Service, Pakistan may experience a default without assistance from the International Monetary Fund (IMF) since its funding alternatives beyond June remain unclear.

Grace Lim, a sovereign analyst with the rating firm in Singapore, reportedly told Bloomberg that Pakistan’s funding choices beyond June are extremely unknown and that the South Asian nation may “default” due to its extremely low reserves.

“We believe Pakistan will be able to make its payments abroad for the rest of the current fiscal year, which ends in June. Beyond June, Pakistan’s financial choices are extremely uncertain. Pakistan’s extremely low reserves make default a possibility without an IMF programme, according to Bloomberg, citing Grace Lim.

The report also underlined Islamabad’s challenges in resuming a $6.5 billion loan programme from the Washington-based lender that has paused because the government has not complied with all loan requirements.

The possibility of a loan delay is increased by political tensions ahead of elections this year, according to the report, since former premier Imran Khan is not showing any signs of giving in to pressure from the government and military.

In response to inquiries on Monday, Lim stated in an emailed answer that an engagement with the IMF past June would encourage additional financing from other multilateral and bilateral partners, which might lower default risk.

She stated Pakistan’s foreign exchange reserves, which are currently at $4.5 billion, are still incredibly low and only have enough money to pay for around one month’s worth of imports.

According to S&P Global Ratings, Pakistan’s gross external finance needs as a percentage of current-account receipts plus useable reserves are expected to increase from 133% in fiscal year 2023 to 139.5% in the fiscal year 2024.

The IMF programme, in our opinion, lays the groundwork for significant fiscal policy reforms, according to Andrew Wood, a sovereign analyst at S&P in Singapore. “Agreement on the current review cycle could also help build more trust among other Pakistan-related bilateral and multilateral lenders.”

It is important to note that Pakistan was not on any board meeting agendas until May 17 when the IMF released its calendar of meetings.

If a staff-level agreement cannot be achieved, funding from international financial organizations will not be available either. In addition, the budget-making process may be impacted if transactions with the IMF are not completed.

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