Election outcome in Pakistan ‘may complicate’ new IMF deal: Fitch

Fitch Ratings, a global rating agency, on Monday said the close outcome of Pakistan’s election and resulting near-term political uncertainty “may complicate” the country’s efforts to secure a new financing agreement with the International Monetary Fund (IMF).

The ongoing $3-billion Stand-By Arrangement (SBA) is scheduled to expire in March 2024.

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“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,” said Fitch Ratings.

Pakistan’s external position has improved in recent months, with the State Bank of Pakistan reporting net foreign reserves of $8 billion as of 9 February 2024, up from a low of $2.9 billion on 3 February 2023.

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: Fitch Ratings

“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,” said Fitch.

“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 said.

The credit rating agency added that Pakistan’s vulnerable external position means securing financing from multilateral and bilateral partners will be “one of the most urgent issues on the agenda for the next government”.

Fitch said that the upcoming government is set to be a coalition of the Pakistan Muslim League-Nawaz party and Pakistan People’s Party, “despite the strong performance by candidates associated with Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) party 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,” said Fitch.

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The agency was of the view that finalising a new IMF deal is 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 said.

However, continued political instability could prolong any discussions with the IMF, delay assistance from other multilateral and bilateral partners, or hamper the implementation of reforms.

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“We believe a government will assume office and engage with the IMF relatively quickly, but risks to political stability are likely to remain high,” Fitch warned.

It added that public discontent could rise further if PTI remains sidelined.

Fitch said that despite Pakistan’s government past record with the IMF, 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 said.

Fitch further said that policy risks could rise again over time if external liquidity pressures ease, either as a result of initial reform successes or developments outside Pakistan, such as a substantial drop in oil prices.

“This could lead to the renewed build-up of economic and external imbalances,” said Fitch.

“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 or reduce import dependence,” it said.