Fitch Ratings has raised concerns over the close outcome of Pakistan’s recent election and the ensuing political uncertainty, which could pose challenges for the country’s efforts to secure a financing agreement with the International Monetary Fund (IMF).
The existing Stand-By Arrangement (SBA) is set to expire in March 2024, and a successor deal is deemed crucial for Pakistan’s credit profile. While Fitch anticipates a new agreement within a few months, any prolonged negotiations or failure to secure a deal could heighten external liquidity stress and increase the risk of default.
Despite recent improvements in Pakistan’s external position, with net foreign reserves reaching USD 8.0 billion as of February 9, 2024, the reserves still fall short of the projected external funding needs. Fitch estimates that Pakistan met less than half of its USD 18 billion funding plan for the fiscal year ending June 2024.
Negotiating a successor deal to the SBA and adhering to its policy commitments will be essential for securing external financing from multilateral and bilateral partners.
While the prospect of finalizing a new IMF deal is seen as challenging, Fitch believes that overcoming resistance to tougher conditions in any successor arrangement is likely due to the acute economic challenges facing the country. However, political instability could potentially hinder discussions with the IMF, delay assistance from other partners, or impede the implementation of crucial reforms.
Despite these challenges, Fitch expects a new government to engage with the IMF relatively quickly, though political stability risks remain high, especially if the Pakistan Tehreek-e-Insaf (PTI) party continues to be sidelined, despite its strong public support revealed in the recent election.
