Global rating agency Moody’s on Tuesday said that Pakistan’s staff-level agreement with the International Monetary Fund (IMF) has improved the funding prospects, but the ability to sustain reforms is key to easing liquidity risks.

In a press release, Moody’s stresses that Pakistan’s success depends on its ability to sustain key reforms to mitigate liquidity risks and ensure the programme’s long-term viability.

The 37-month Extended Fund Facility Arrangement (EFF), agreed upon on July 12 and awaiting IMF Executive Board approval, is expected to provide credible financing and attract further support from bilateral and multilateral partners.

“If approved, which we expect is likely, the new IMF programme will improve Pakistan’s (Caa3 stable) funding prospects. The programme will provide credible sources of financing from the IMF and catalyze funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs,” the agency stated.

Moody’s underscores the importance of Pakistan’s commitment to implementing extensive reforms, such as broadening the tax base, eliminating exemptions, adjusting energy tariffs in a timely manner to restore sector viability, improving state-owned enterprise management, advancing privatization, phasing out agricultural support prices and subsidies, and enhancing anti-corruption, governance, and transparency measures. Additionally, gradual trade policy liberalization is crucial.

Despite these steps, Moody’s acknowledges potential challenges, including social tensions arising from the high cost of living, which may be aggravated by higher taxes and energy tariff adjustments. The possibility of the coalition government lacking a strong mandate to consistently implement these tough reforms also poses a risk.

Pakistan’s external position remains fragile, with significant external financing needs over the coming years. The country’s foreign exchange reserves are currently well below the necessary level, making it vulnerable to policy missteps. Weak governance and high social tensions could further impede the government’s reform efforts, potentially threatening the completion of IMF reviews and access to external financing.

Moody’s emphasizes that consistent reform implementation is vital for Pakistan to fully benefit from the IMF programme and achieve a sustainable reduction in liquidity risks.