The closely contested outcome of Pakistan’s recent election and the ensuing political ambiguity may pose challenges to the nation’s efforts to secure a financing agreement with the International Monetary Fund (IMF), replacing the expiring Stand-By Arrangement (SBA) in March 2024, according to Fitch Ratings.
Fitch warned on Monday that the uncertain political landscape in Pakistan could potentially complicate negotiations for a new financing deal, crucial for the country’s credit profile. While Fitch assumes that an agreement will likely be reached in the coming months, the rating agency underscored that prolonged negotiations or a failure to secure the deal could heighten external liquidity stress and increase the risk of default.
Despite recent improvements in Pakistan’s external position, with the State Bank of Pakistan reporting net foreign reserves of $8 billion as of February 9, 2024, up from a low of $2.9 billion in February 2023, Fitch noted that these reserves remain low compared to projected external funding needs. The agency estimated that Pakistan met less than half of its $18 billion funding plan in the first two quarters of the fiscal year ending June 2024, excluding routine rollovers of bilateral debt.
The vulnerability of Pakistan’s external position emphasised the urgency of securing financing from multilateral and bilateral partners, making it a top priority for the incoming government, which is expected to be a coalition of the Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Peoples Party (PPP), 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 its policy commitments will be crucial not only for IMF financing but also for other external funding flows, shaping the nation’s economic trajectory in the long run. The complexity of finalising a new IMF deal was acknowledged by Fitch, which anticipated tougher conditions for any successor arrangement, potentially facing resistance from entrenched interests in Pakistan. However, Fitch assumed that the acute economic challenges faced by the country will likely override any resistance.
Continued political instability could extend discussions with the IMF, delay assistance from other partners, or impede reform implementation. Despite expectations of a quick engagement with the IMF by the new government, risks to political stability remain high, especially if PTI continues to be sidelined, given its significant public support revealed in the recent election.
Fitch acknowledged Pakistan’s historical challenges in completing IMF programs but points out fair progress under the current SBA. The rating agency saw a stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor arrangement.
However, Fitch also warned of potential policy risks if external liquidity pressures ease, leading to a renewed build-up of economic and external imbalances. The agency emphasised that Pakistan’s external finances will likely remain structurally weak until there is substantial progress in developing a private sector capable of generating increased export income, attracting foreign direct investment, or reducing import dependence.
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