By Staff Reporter
KARACHI: Pakistan faces a daunting task to secure a new loan from the International Monetary Fund as it grapples with political turmoil after a close election, Fitch Ratings warned on Monday.
The credit rating agency said a new IMF deal is crucial for Pakistan’s credit profile and it expects one to be reached within months, but cautioned that “an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default”.
Pakistan’s current IMF programme, a $3 billion Stand-By Arrangement (SBA), expires in March 2024 and Fitch said any successor deal would likely come with stricter conditions.
“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,” the rating agency said. “Nonetheless, we assume any resistance will be overcome, given the acute nature of the country’s economic challenges and the limited alternatives.”
Pakistan’s election on Feb. 8 resulted in a hung parliament, with no party winning a clear majority. The Pakistan Muslim League-Nawaz of former Prime Minister Nawaz Sharif and the Pakistan People’s Party of former President Asif Ali Zardari have agreed to form a coalition government, despite a strong showing by the Pakistan Tehreek-e-Insaf party led by jailed Imran Khan.
The rating agency said continued political instability could delay discussions with the IMF and assistance from other multilateral and bilateral partners, and hamper the implementation of reforms.
“We believe a government will assume office and engage with the IMF relatively quickly, but 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.”
Fitch said 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.
“The sovereign’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.”
Pakistan’s governments have a poor record of completing IMF programmes – less than half of its 24 IMF programmes have disbursed more than 75 percent of the funding available. However, there has been fair progress on targets under the current SBA. Moreover, there is stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor arrangement.
Fitch said 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.
“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.”
Pakistan’s external position has improved in recent months, with the State Bank of Pakistan reporting net foreign reserves of $8.1 billion as of February 9, 2024, up from a low of $2.9 billion on February 3, 2023.
“Nevertheless, this (reserve) is low relative to projected external funding needs, which we expect will continue to exceed reserves for at least the next few years,” Fitch said. “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.
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