Moody's Investors Service (Moody's) termed the no-confidence motion against Prime Minister Imran Khan as a ‘credit negative’ due to concerns over policy continuity and the government's ability to implement reforms.

"We view the no-confidence motion as credit negative because it raises significant uncertainty over policy continuity, as well as the government's ability to continue to implement reforms to increase productivity growth and secure external financing, including from the International Monetary Fund (IMF)," it said.

Debate on the no-confidence motion is due to start today, leaving Khan scrambling to keep his own Pakistan Tehreek-e-Insaf (PTI) members on his side, along with those from a slew of minority parties.

On Wednesday, a key coalition partner, the Muttahida Qaumi Movement-Pakistan (MQM-P), switched allegiance ahead of the no-confidence vote, dealing a massive blow to the PTI government.

Moody's warned that the no-confidence motion comes at a time when Pakistan is engulfed with surging inflation and widening current account deficit amid rising global commodity prices.

“A further deterioration in its external position, including a significant widening of the current account deficit and an erosion of foreign-exchange reserves, would threaten the government’s external repayment capacity and heighten liquidity risks,” it said.

Moody’s said that the ongoing Russia-Ukraine military conflict has added pressure on Pakistan's foreign-exchange reserves in recent months, amid elevated global commodity prices and a recovery in domestic demand.

Pakistan, which is a net importer of oil products, has seen its current account deficit surge to more than $12 billion between July 2021 and February 2022, as compared to a $1 billion surplus recorded in the same period a year earlier.

“We now expect the deficit to widen to 5-6% of GDP in fiscal 2022 (ending June 2022) compared with our previous forecast of 4%. This further widening will put greater pressure on Pakistan’s foreign reserves, which declined to $14.9 billion as of February 2022 from $18.9 billion in July 2021, according to IMF data, sufficient to cover only around two months of imports,” said Moody’s.

The credit ratings agency said that securing external financing, including from the IMF, will be key for Pakistan to continue to meet its external obligations given the pressures on its foreign-exchange reserves.

“However, the no-confidence motion raises significant uncertainty over the government’s capacity to commit to implementing reforms, particularly those aimed at broadening the revenue base.

“How Pakistan will approach the IMF program from this point on is uncertain, and its participants could be in doubt,” it said.

Pakistan is currently in its seventh review under the IMF’s Extended Fund Facility programme, which has disbursed $3 billion out of the stipulated $6 billion to date.

The Ministry of Finance has so far remained tight-lipped about the current status of the seventh review dating back to March 22 when the finance minister announced that he was expecting a response to the explanation provided to the Fund on the financing the Prime Minister’s relief package.

The Fund had expressed serious concerns over financing of Prime Minister’s Relief Package – Rs10 per litre reduction on petroleum and products and Rs5 per unit reduction in electricity tariffs to be applicable till 30 June 2022 - as well as the industrial package announced on 1st March, envisaging tax amnesty scheme for the industrial sector.

This story was first published in Business Recorder on March 31, 2022.