Arif Ali—AFP

Ratings agency says the fuel shortages reflect on strained finances of state-owned companies.

Pakistan’s fuel shortage, blamed for worsening power blackouts, is weighing on its credit worthiness and hindering its ability to meet key reform targets laid out by the International Monetary Fund, ratings agency Moody’s warned on Monday.

The country, last week, was in the grip of one of its worst power crises in years due to a shortfall in imported oil, with the situation exacerbated on Sunday by an attack on a key power line in restive Balochistan province.

Moody’s said that increasing energy imports without addressing structural issues that create so-called circular debt “will further strain Pakistan’s budget and balance of payments, a credit negative.”

“Fuel shortages also reflect the strained finances of state-owned distribution companies and the fuel importer, Pakistan State Oil corporation, and are a setback to the sector’s progress on reforms made so far under Pakistan’s financial support program with the International Monetary Fund.”

The IMF granted a $6.6-billion loan to Pakistan in September 2013 on the condition that it carry out extensive economic reforms, particularly in the energy and taxation sectors. Moody’s, which in July 2014 upgraded Pakistan’s rating outlook from “negative” to “stable” in a boon for the shaky South Asian economy, said that structural reforms had been a “key driver” in its decision last year.

“Circular debt”—brought on by the dual effect of the government setting low electricity prices and customers failing to pay—is at the heart of the crisis. State utilities lose money, and cannot pay private power generating companies, which in turn cannot pay the oil and gas suppliers, who cut off the supply.

The fuel crisis began last week when Pakistan State Oil was forced to slash imports because banks refused to extend any more credit to the government-owned company, which supplies 80 percent of the country’s oil. The shortfall led to long queues of angry motorists at petrol stations, though these have since dissipated as fuel supplies have reached the pumps.

But Moody’s warned that the government of Prime Minister Nawaz Sharif, which made solving the energy crisis a key campaign pledge, had so far failed to offer policy solutions and increasing oil supplies would only add to the fiscal burden.

“The government’s targeted fiscal deficit of 4.5 percent of GDP in fiscal 2015 from 4.7 percent in fiscal 2014 is already impeded by delays in implementing electricity tariff adjustments and legal challenges related to tax collections,” it said. Increasing fuel imports, which currently comprise 35 percent of total imports, would further weigh on Pakistan’s import bill, it added.