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Fitch Ratings on Monday upgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC’ from ‘CCC-,’ citing an improvement in the country’s external liquidity after the government inked a nine-month $3 billion stand-by arrangement with the International Monetary Fund (IMF).
“Another positive news toward current economic revival journey,” wrote Finance Minister Ishaq Dar on Twitter while sharing the news. “Congratulations to P.M. Shehbaz Sharif, the nation, government allies, and economic team,” he added.
In its official statement, Fitch said it expected the staff-level agreement (SLA) for the short-term arrangement to be approved by the IMF’s Executive Board in July, unlocking further financial support and anchoring policies ahead of general elections due later this year. However, it warned, risks remained on the implementation of the IMF program and securing external funding due to the large financing requirements and a persistently volatile political climate.
According to the ratings agency, Pakistan had in recent months sought to address shortfalls in its revenue collection, energy subsidies and market-determined exchange rate, which had prevented the previous IMF program from proceeding since November 2022. As part of this, it said, it had amended the proposed budget for the upcoming fiscal year by introducing new revenue measures and cutting spending. It has also removed import restrictions and abandoned attempts at exchange-rate management, it added.
However, Fitch sounded caution over Pakistan’s ability to implement much-needed reforms, noting the country has an extensive record of deviating from 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 challenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election commitment to the program,” it said.
Nonetheless, it noted, the IMF SLA would help unlock commitments from Saudi Arabia and the U.A.E., as well as other multilateral funding and the roughly $10 billion in aid pledges for flood relief.
The ratings agency said 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 government funding target, it said, includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, noting this could prove challenging. However, it added, some of the loans not rolled over in the last fiscal year could now return. Loans amounting to $9 billion from China, Saudi Arabia and the U.A.E. would likely also be rolled over, it added.
Referring to Pakistan’s current economic standing, Fitch said the country’s current account deficit (CAD) had narrowed sharply due to import restrictions and lack of foreign exchange availability, tighter fiscal and economic policies, measures to limit energy consumption and lower commodity prices. “Pakistan posted current account surpluses in March-May 2023, and we forecast a CAD of about $4 billion (1% of GDP) in FY24, after $3 billion in FY23 and over $17 billion in FY22. Our forecast CAD is lower than the $6 billion in the budget, on the assumption that not all of the planned new funding will materialize, constraining imports,” it said, while cautioning that CAD could widen beyond expectations as import backlogs are cleared and materials imported for the manufacturing sector, and for reconstruction needs. “Nevertheless, currency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after partly switching to unofficial channels to benefit from more favorable parallel market exchange rates,” it added.