Days after Pakistan clinched a deal with International Monetary Fund (IMF), Fitch Ratings upgraded the country’s long-term foreign-currency issuer default rating (IDR) to ‘CCC’ from ‘CCC-‘ citing improvement in the country’s external financing.
The global rating agency said the upgrade reflects Pakistan’s improved external liquidity and funding conditions following staff-level agreement (SLA) with the IMF on a nine-month stand-by arrangement (SBA) for 3 $billion loan.
“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,” it said in a statement.
However, the rating agency said the IMF programme implementation and external funding risks remain due to a volatile political climate and large external financing requirement.
Fitch Ratings also highlighted measures taken by Pakistan 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.”
Most recently, the global agency said the government amended its proposed budget for the fiscal year ending June 2024 (FY24) to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February.
The authorities appeared to abandon exchange-rate management in January 2023, although guidelines on prioritising imports were only removed in June, it said.
Implementation risks
The rating agency said 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 added.
The fitch ratings said 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.
Saudi Arabia and the United Arab Emirates have committed another $3 billion in deposits, and the authorities expect $3-5 billion in other new multilateral funding after the IMF agreement.
“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).”
Funding targets
Pakistan expects $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 rating agency said.
It added that 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 the last fiscal year could now return. Moreover, $9 billion in maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over, as in FY23, the agency said.
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