MOODY’S recent assessment on Pakistan’s inconclusive election outcome resulting in a hung parliament, as well as the ensuing hectic politicking for the formation of a new coalition government, is indicative of investors’ anxiety over political uncertainty. The split public mandate followed by claims of election fraud, which potentially could lead to more political instability, has drawn ‘credit negativity’ from Moody’s analysts. And, given the defiant mood of a few major parties, the rating agency’s opinion does not come as a surprise. “While negotiations between parties to form a coalition government are currently underway,” it warns, “prolonged delays will raise political and policy uncertainties at a time when Pakistan faces significant macroeconomic challenges, particularly its very weak external and liquidity position.” Moreover, the agency argues, the coalition set-up might not be politically strong or united, making consensus difficult on pursuing tough but necessary reforms. Moody’s assessment of the post-poll situation is in line with the views of most Pakistani commentators who have repeatedly cautioned in recent weeks that flawed polls could undermine the legitimacy of the new government, intensify political and economic uncertainties, and affect the rulers’ ability to take tough decisions and implement the reforms needed to stabilise and boost the fragile economy.

Moody’s assertion that uncertainties will make it tough for the incoming government to approach the IMF for a bigger programme in April, weaken the external economy, and make liquidity management more challenging might seem far-fetched to many. However, it cannot be ruled out. We have seen the previous PDM administration delay the execution of the IMF-mandated reforms for as long as it could to avoid a public backlash. How strong the incoming coalition will be is anyone’s guess. Some are pinning their hopes on the military-backed SIFC. But the SIFC cannot be a substitute for longer-term political and policy stability. Despite the SIFC, the Gulf nations, which committed billions of dollars in investment, have so far hesitated from entering the Pakistan market due to political uncertainty. That Pakistan’s finances could collapse and the country default on its international payments unless the IMF agrees to bail it out, thus unlocking funds from other bilateral, multilateral and commercial lenders, is well-known. How the new coalition deals with the Fund, and when, in spite of the volatile political conditions, will determine the economic course of the country.

Published in Dawn, February 17th, 2024