Fitch upgrades Pakistan to ‘CCC’ after IMF deal

Fitch Ratings on Monday upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘CCC-’ as the country managed to clinch a ‘last-minute’ staff-level agreement with the International Monetary Fund (IMF).

“The upgrade reflects Pakistan’s improved external liquidity and funding conditions following its Staff-Level Agreement (SLA) with the IMF on a nine-month Stand-by Arrangement (SBA) in June,” said Fitch Ratings.

“We expect the SLA to be approved by the IMF board in July, catalysing other funding and anchoring policies around parliamentary elections due by October.

“Nevertheless, programme implementation and external funding risks remain due to a volatile political climate and large external financing requirement,” it said.

The agency added that Pakistan in its bid to appease the Washington-based lender has recently taken measures to address shortfalls in government revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate, including import financing restrictions.

“These issues held up the last three reviews of Pakistan’s previous IMF programme, before its expiry in June,” it said.

However, the US based credit rating agency expressed concerns over the risk of implementation on the commitments agreed by the IMF.

“Pakistan has an extensive record of going off-track on its commitments to the IMF. We understand the government has already made all the required policy actions under the SBA. Nevertheless, there is still scope for delays and challenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election commitment to the programme,” it said.

IMF ‘seeks assurances’ from Pakistan’s political parties on commitment to new SBA

Fitch Ratings said the IMF board approval of the SBA will unlock an immediate disbursement of $1.2 billion, with the remaining $1.8 billion scheduled after reviews in November and February 2024.

“The SBA should also facilitate disbursement of some of the USD10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans (USD2 billion in the budget),” it said.

However, the Pakistan’s overall funding targets remain ambitious, noted the rating agency.

“The authorities expect $25 billion in gross new external financing in FY24, against $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral creditors.

“The government funding target includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which could prove challenging, although some of the loans not rolled over in FY23 could now return,” it said.

The SBA should also facilitate disbursement of some of the USD10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans (USD2 billion in the budget: Fitch Ratings

Fitch was of the view that the $9 billion in maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over, as in FY23.

It said that the current account deficit (CAD) narrowed sharply, driven by earlier restrictions on imports and FX availability, tighter fiscal and economic policies, measures to limit energy consumption and lower commodity prices.

“We forecast a CAD of about USD4 billion (1% of GDP) in FY24, after $3 billion in FY23 and over $17 billion in FY22. Our forecast CAD is lower than the USD6 billion in the budget, on the assumption that not all of the planned new funding will materialise, constraining imports,” it said.

However, the CAD could widen more than we expect, given continued reports of import backlogs, the dependence of the manufacturing sector on foreign inputs, and reconstruction needs after last year’s floods, it highlighted.

“Nevertheless, currency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after partly switching to unofficial channels to benefit from more favourable parallel market exchange rates,” Fitch said.

The agency expected a modest recovery in foreign exchange reserves for the rest of FY24 on new external financing flows, although these flows will also lead to a renewed widening of the CAD.

On the political front, Fitch said “the enduring popularity of Imran Khan, former prime minister, and PTI create policy uncertainty around elections”.

“We expect the consolidated general government (GG) fiscal deficit to widen to 7.6% of GDP in FY24, from an estimated 7.0% in FY23, driven by higher interest costs on domestic debt, which accounts for the difference between our forecast and a GG deficit of 7.1% of GDP in the revised FY24 budget statement (with a lower figure of 6.5% in the medium-term fiscal framework).

“Fiscal consolidation will drive a slight improvement in our forecast GG primary deficit to 0.1% of GDP in FY24, from 0.5% of GDP in FY23,” it said.