Global ratings agency Fitch on Monday warned that the “close outcome” of the February 8 polls and the resulting “near-term political uncertainty” may complicate Pakistan’s efforts to secure a financing agreement with the International Monetary Fund (IMF).
Nearly 60.6 million Pakistanis voted in the country’s 12th general elections earlier this month amid a day-long suspension of cellular services and rigging allegations.
However, the outcome of the polls resulted in a split mandate as PTI-backed independent candidates emerged at the top in the National Assembly elections.
Subsequently, the PPP and PML-N began efforts to hammer out some sort of power-sharing formula in the national and Punjab assemblies. On the other hand, the PTI has announced an alliance with the Sunni Ittehad Council in the Centre, Khyber Pakhtunkhwa and Punjab.
In a report released today, US-based Fitch Ratings — one of three leading global rating agencies — said a new IMF deal, to succeed the Stand-By Arrangement (SBA) expiring in March 2024, was key to Pakistan’s credit profile.
“[…] We assume one will be reached within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default,” it said.
The rating agency highlighted that while Pakistan’s external position had improved in recent months — with the State Bank of Pakistan reporting net foreign reserves of $8.0 billion as of Feb 9 — “this is low relative to projected external funding needs” that are expected to exceed reserves for the next few years.
“We estimate Pakistan met less than half of its USD18 billion funding plan in the first two quarters of the fiscal year ending June 2024 (FY24), excluding routine rollovers of bilateral debt,” it said.
Fitch further noted that the sovereign’s vulnerable external position meant that securing financing from multilateral and bilateral partners would “be one of the most urgent issues on the agenda for the next government”.
“This looks set to be a coalition of the PML-N and PPP, despite the strong performance by candidates associated with Imran Khan’s PTI in the election. Negotiating a successor deal to the SBA and adhering to the policy commitments under it will be critical to most other external financing flows, not just from the IMF, and will strongly influence the country’s economic trajectory in the longer term,” it stated.
Fitch said that finalising a new IMF deal was likely to be challenging.
“The current SBA is an interim package and we believe any successor arrangement would come with tougher conditions, which may be resisted by entrenched vested interests in Pakistan. Nonetheless, we assume any resistance will be overcome, given the acute nature of the country’s economic challenges and the limited alternatives,” it added.
The rating agency further warned that continued political instability could prolong any discussion with the IMF, delay assistance from other multilateral and bilateral partners or hamper the implementation of reforms.
“We believe a government will assume office and engage with the IMF relatively quickly, but risks to political stability are likely to remain high,” it said, warning that public discontent could rise if the PTI remained sidelined.
Moreover, Fitch said Pakistan’s government had a “poor record” of completing IMF programmes and highlighted that less than half of the South Asian country’s 24 IMF programmes had disbursed over 75 per cent of the funding available.
“However, there has been fair progress on targets under the current SBA. Moreover, we perceive there is a stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor arrangement.”
The rating agency said that policy risks could rise over time if the external liquidity pressure eased.
“This could lead to the renewed build-up of economic and external imbalances. We believe Pakistan’s external finances will remain structurally weak until and unless it develops a private sector that can generate greater significantly more export income, attract FDI (foreign direct investment) or reduce import dependence,” it added.
