Fitch Ratings has raised Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC’ from ‘CCC-‘ due to improved external liquidity as a result of a short-term stand-by agreement with the International Monetary Fund (IMF).
The global rating agency said in an official statement issued on Monday that the upgrading reflected Pakistan’s improved external liquidity and funding conditions following its staff-level agreement (SLA) with the IMF on a nine-month stand-by arrangement (SBA) in June.
“We anticipate that the SLA will be approved by the IMF board in July, catalysing other funding and anchoring policies around the October parliamentary elections,” it added.
However, due to a turbulent political atmosphere and high external financing requirements, the rating agency stated that the IMF programme implementation and external funding concerns remain.
Fitch Ratings also emphasized Pakistan’s efforts to resolve deficiencies in government revenue collection, energy subsidies, and regulations inconsistent with a market-determined currency rate, such as import financing limitations. “These issues stymied the last three reviews of Pakistan’s previous IMF programme, which was set to expire in June.”
Following additional tax measures and subsidy changes in February, the worldwide agency recently stated that the government changed its proposed budget for the fiscal year ending June 2024 (FY24) to implement new revenue measures and slash spending.
According to the report, the authorities appeared to abandon exchange-rate management in January 2023, even though directives on prioritising imports were only eliminated in June.
Implementation Risk
According to the rating agency, Pakistan has a long history of failing to meet its IMF commitments. “From what we understand, the government has already taken all of the necessary policy actions under the SBA.” Nonetheless, there is still room for implementation delays and obstacles, as well as new policy mistakes ahead of the October elections and doubt about post-election commitment to the programme,” it noted.
According to Fitch Ratings, IMF board approval of the SBA will result in an immediate release of $1.2 billion, with the remaining $1.8 billion planned for disbursement following assessments in November and February 2024.
Saudi Arabia and the United Arab Emirates (UAE) have committed a further $3 billion in deposits, and the authorities anticipate an additional $3-5 billion in fresh international funding following the IMF deal.
“The SBA should also help facilitate the 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 ambitious
According to the rating agency, Pakistan expects $25 billion in gross fresh external funding in FY24, compared to $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral creditors.
It went on to say that the government’s funding aim includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which could be difficult, but some of the loans that were not rolled over in the previous fiscal year could now be repaid. Furthermore, as in FY23, $9 billion in maturing deposits from China, Saudi Arabia, and the UAE would most likely be rolled over, according to the agency.
