Global rating agency Fitch has said that the near-term political uncertainty emerging after the general election may complicate Pakistan’s efforts to secure a financing agreement with the International Monetary Fund (IMF).
“A new deal is key to the country’s credit profile, and we assume one will be achieved within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default,” the rating agency said on Monday.
The Stand-By Arrangement (SBA) is expiring in March 2024, it added.
Meanwhile, Fitch said that Pakistan’s external position has improved in recent months, with the State Bank of Pakistan reporting net foreign reserves of $8 billion as of February 9, 2024, up from a low of $2.9 billion on February 3, 2023.
“Nevertheless, this is low relative to projected external funding needs, which we expect will continue to exceed reserves for at least the next few years. We estimate Pakistan met less than half of its $18 billion funding plan in the first two quarters of the fiscal year ending June 2024 (FY24), excluding routine rollovers of bilateral debt,” it added.
The country’s vulnerable external position means that securing financing from multilateral and bilateral partners will be one of the most urgent issues on the agenda for the next government.
“This looks set to be a coalition of the Pakistan Muslim League-Nawaz (PML-N) and Pakistan People’s Party (PPP), despite the strong performance by candidates associated with the Pakistan Tehreek-e-Insaf (PTI) in the election,” Fitch stated.
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.
According to Fitch, the new government will find it challenging to secure a new IMF deal as 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 said.
For the agency, continued political instability could prolong any discussions with the IMF, delay assistance from other multilateral and bilateral partners, or hamper the implementation of reforms.
The rating agency was confident that a government will assume office and engage with the IMF relatively quickly, however, it said that the risks to political stability are likely to remain high.
“Public discontent could rise further if PTI remains sidelined – the election revealed continued strong public support for the party,” it said.
Recalling governments’ poor record of completing IMF programmes, Fitch said that there has been fair progress on targets under the current SBA.
“Moreover, we perceive there is stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor arrangement,” it added.
