—— Upgrade reflects Pakistan’s improved funding conditions after IMF deal
—— Agency says “We expect the SLA to be approved by the IMF board in July”
—— Argues external funding risks remain due to volatile political climate
HONG KONG: Fitch Ratings has upgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC’ from ‘CCC-’ due to improvement in the country’s external liquidity following a short-term stand-by agreement with the International Monetary Fund (IMF).
In an official statement issued on Monday, the global rating agency said the upgrade reflects Pakistan’s improved external li-quidity and funding conditions following its staff-level agreement (SLA) with the IMF on a nine-month stand-by arrangement (SBA) in June.
“We expect the SLA to be approved by the IMF board in July, catalysing other funding and anchoring policies around parlia-mentary elections due by October,” it added.
However, the rating agency said the IMF programme implementation and external funding risks remain due to a volatile political climate and large external financing requirements. Fitch Ratings also highlighted measures taken by Pakistan to address shortfalls in government revenue collection, energy subsi-dies 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 chal-lenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election com-mitment 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 remain-ing $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 bor-rowing, 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. –Agencies
