Moody’s report: New IMF programme fails to alleviate debt pressures in Pakistan

ISLAMABAD: Moody’s Investors Services has warned that the interest costs for Pakistan are projected to rise to nearly 40 percent of total spending in 2025, up from approximately 25 percent in 2021. The caution comes amid concerns about social risks associated with fulfilling the conditions of new multilateral financing.

In its report titled ‘2025 Outlook – Stable as Economic Risks Recede, Geopolitical and Trade Risks Persist’,  Moody’s noted that Pakistan recently entered into a new $7 billion programme with the International Monetary Fund (IMF) to ease liquidity challenges. However, funds from concessional lenders may not fully cover the country’s maturing debt, and meeting the requirements attached to new multilateral financing could be challenging and may exacerbate social risks.

The agency highlighted that government debt affordability in Pakistan will remain lower than pre-pandemic levels. Among countries in the Asia-Pacific region, Pakistan is particularly susceptible to food security crises. The report indicates that debt affordability in emerging and frontier markets, specifically in Pakistan (Caa2 positive), Nigeria (Caa1 positive), and Egypt, will continue to lag compared to pre-pandemic times.

Several countries are expected to encounter Eurobond redemptions exceeding 10 percent of their usable international reserves by 2025, including Bahrain (B2 stable) and Tunisia. Moreover, local currency financing needs will remain substantial, with gross domestic financing requirements surpassing 10 percent of GDP in Pakistan and Zambia (Caa2 stable), even after defaults.

Consequently, risks related to both local and foreign currency liquidity will be prominent factors leading to potential defaults, according to the rating agency.

In advanced economies, median debt affordability in 2025 is anticipated to remain stronger than before the pandemic, although improvements may be diminished. An exception is Greece, where ongoing deleveraging will contribute to enhanced debt affordability. Conversely, debt affordability in the United States and France is expected to deteriorate significantly.

Moody’s also pointed out that escalating geopolitical tensions are contributing to increased global military expenditures. Years of inadequate investment and the rising threats from Russia have prompted various European nations to boost their defense budgets to meet NATO’s target of at least two percent of GDP. Japan’s Defense Capability Buildup Program is set to absorb an increasingly larger share of its budget in 2025, while India’s military spending is expected to climb sharply due to tensions with China and Pakistan.

While global food prices are anticipated to remain significantly lower than in previous years, low-rated frontier markets such as Mozambique (Caa2 stable) and Rwanda (B2 stable) in Sub-Saharan Africa, Nicaragua (B2 stable) and Honduras (B1 stable) in Latin America, as well as Bangladesh and Pakistan in the Asia-Pacific region, are considered highly vulnerable to food security crises.