Fitch Ratings has raised Pakistan’s long-term foreign currency issuer default rating (IDR) from “CCC-” to “CCC” as a result of an increase in the nation’s external liquidity as a result of a temporary stand-by arrangement with the International Monetary Fund (IMF).
According to a statement made public on Monday by the international rating agency, Pakistan’s improved external liquidity and funding conditions as a result of its staff-level agreement (SLA) on a nine-month stand-by arrangement (SBA) with the IMF in June are reflected in the upgrade. “We anticipate that the IMF board will approve the SLA in July, catalyzing other funding and anchoring policies around the parliamentary elections that are scheduled for October,” it continued. Due to a tumultuous political environment and substantial external financing requirements, the rating agency stated that there are still risks associated with the implementation of the IMF programme and external funding.
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.
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 (UAE) 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).”
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.
