Pakistan’s Political Uncertainty After Elections is Credit Negative: Moody’s

Political uncertainty persists in Pakistan following inconclusive election results, a credit negative, says Moody’s Investors Services (Moody’s).

In a report on Pakistan Moody’s stated that on 8 February, Pakistan (Caa3 stable) held its general election, with the vote count concluding on 11 February.

The results point to a hung parliament because no party has won enough seats – at least 134 out of the 266 contested seats – to form the majority government. While negotiations between parties to form a coalition government are currently underway, 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.

According to the Election Commission of Pakistan, independent candidates mostly backed by Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) party won 101 seats. Pakistan Muslim League (N) – PML-N – led by former prime minister Nawaz Sharif, was second with 75 seats. Pakistan Peoples Party (PPP) came in third with 54 seats. Other smaller parties won the rest of the seats, stated Moody’s.

The agency said that the inconclusive results have exacerbated political tensions amid allegations of vote rigging and tempering, leading to protests in various cities across the country.

The results will also begin a complex process of parties trying to secure support from other parties in a bid to lead a coalition government. Prolonged delays in the formation of a government will increase policy and political uncertainty in the country at a time when it faces very challenging macroeconomic conditions.

Pakistan’s foreign exchange reserves remain very low at $8 billion as of 2nd of February, sufficient to cover only about six weeks of imports and well below what is required to meet its external financing needs for the next three to four years.

Based on the IMF report published in January, Pakistan’s external financing needs are about $22 billion in fiscal 2025 (ending June 2025) and about $25 billion annually in fiscal 2026 and 2027. The country will need a longer-term financing plan to meet its very large financing needs for the next few years, after its current IMF program ends in April 2024.

The credit rating agency stated that even if a combination of parties successfully forms a multiparty coalition government, the coalition may not be very united and politically strong. The new government will face challenges in securing consensus to pursue difficult but necessary reforms, including revenue-raising measures, to improve Pakistan’s macroeconomic conditions.

Moreover, there is also uncertainty around the extent of public protests because they may challenge the legitimacy of the new government. Social tensions may increase which would likely constrain the government’s ability to undertake reforms, it added.

Overall, uncertainty around Pakistan’s ability to quickly negotiate a new IMF program after the current one expires in April 2024
remains very high. Pakistan’s government liquidity and external vulnerability risks will remain very high until there is clarity on a credible longer-term financing plan.