Daily Times

Moody’s Investors Service on Tuesday warned of political risks following “highly controversial” general elections in Pakistan that could lead to insufficient mandate for the next government to pursue difficult economic reforms needed at this stage.

The international agency maintained Pakistan’s ratings, including its Caa3 long-term issuer rating, with a stable outlook unchanged after completing a periodic review of the country’s ratings.

“Pakistan’s credit profile reflects the government’s very high liquidity and external vulnerability risks as the very low levels of foreign exchange reserves remain well below what is required to meet its very high external financing needs over the near to medium term,” Moody’s said in the review report.

The agency did not announce a credit rating action but highlighted the “country’s very weak fiscal strength and elevated political risks” that may also constrain the credit profile.

The South Asian nation is in the process of forming a government after key political parties, Pakistan Muslim League-Nawaz (PML-N) and Pakistan Peoples Party (PPP), agreed on a power-sharing formula last week.

The general elections were marred by allegations of rigging and manipulation.

“Political risks are high, following a highly controversial general elections held on 8 February 2024,” the agency said.

Although a coalition government looks set to be formed, the report said there was high uncertainty around the newly elected government’s willingness and ability to quickly negotiate a new International Monetary Fund program soon after the current $3 billion short-term loan expires next month.

Moody’s said Pakistan’s ability to secure loans from other bilateral and multilateral partners would be severely constrained until the new IMF financing was reached.

Its assessment comes only a year after it downgraded the country’s rating to Caa3 from Caa1, following deadlock in talks with the IMF amid depletion of foreign exchange reserves.

The large amount of external financing required over the medium term along with Pakistan’s very low reserves position imply material default risks if there were funding delays from the IMF and other partners.

“Social pressures and weaknesses in governance may also raise challenges in meeting criteria for future IMF funding,” the agency said.

The agency warned that the rating would likely be downgraded if Pakistan were to default on its debt obligations to private-sector creditors and the expected losses to creditors as a result of any restructuring were larger than consistent with a Caa3 rating.