Fitch upgrades Pakistan’s rating following IMF agreement

Global rating agency Fitch has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘CCC-’ to ‘CCC’, reflecting the country’s improved external liquidity and funding conditions following its staff-level agreement (SLA) with the International Monetary Fund (IMF).

Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) was upgraded after the staff-level agreement with the IMF on a nine-month Stand-by Arrangement (SBA) in June.

The rating agency stated, “We expect the SLA to be approved by the IMF board in July, catalysing other funding and anchoring policies around parliamentary elections due by October. Nevertheless, programme implementation and external funding risks remain due to a volatile political climate and large external financing requirement.”

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On June 30, Pakistan had signed a badly needed $3 billion staff-level agreement with the International Monetary Fund (IMF). International Monetary Fund (IMF) announced that a “Stand-By Arrangement” was reached successfully with Pakistan, valuing $3 billion for 9 months.

The final approval of this agreement will be given by the IMF’s executive board, which is expected to take place in mid-July. After this approval, Pakistan can receive a loan of $3 billion.

Fitch noted that Pakistan has recently taken measures to address shortfalls in government revenue collection, energy subsidies 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.

READ: Pakistan signs $3bn staff level agreement with IMF

It also stated that the government has most recently 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 added.

Regarding its implementation risks, the New York-based agency stated, “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 challenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election commitment to the programme,” it said.

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Fitch said that the SLA’s approval by the IMF executive board will unlock an immediate disbursement of USD1.2 billion, with the remaining USD1.8 billion scheduled after reviews in November and February 2024.

Saudi Arabia and the United Arab Emirates have committed another USD3 billion in deposits, and the authorities expect USD3-5 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).

Regarding the overall funding targets ambitions, the agency said, “The authorities expect USD25 billion in gross new external financing in FY24, against USD15 billion in public debt maturities, including USD1 billion in bonds and USD3.6 billion to multilateral creditors.”

“The government funding target includes USD1.5 billion in market issuance and USD4.5 billion in commercial bank borrowing, both of which could prove challenging, although some of the loans not rolled over in FY23 could now return. USD9 billion in maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over, as in FY23.”

It stated that Pakistan’s current account deficit (CAD) has narrowed sharply, driven by earlier restrictions on imports and FX 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 USD4 billion (1% of GDP) in FY24, after USD3 billion in FY23 and over USD17 billion in FY22. Our forecast CAD is lower than the USD6 billion in the budget, on the assumption that not all of the planned new funding will materialise, constraining imports.

On Pakistan’s external deficit risks, it said, “Pakistan’s current account deficit (CAD) has narrowed sharply, driven by earlier restrictions on imports and FX 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 USD4 billion (1% of GDP) in FY24, after USD3 billion in FY23 and over USD17 billion in FY22. Our forecast CAD is lower than the USD6 billion in the budget, on the assumption that not all of the planned new funding will materialise, constraining imports.”

‘Reserves Still Low’

Fitch said that Liquid net FX reserves of the State Bank of Pakistan have hovered around USD4 billion since February 2023, or less than a month of imports, down from a peak of more than USD20 billion at end-August 2021.

“The collapse in reserves reflected large CADs, external debt servicing and earlier FX intervention by the central bank. We expect a modest recovery for the rest of FY24 on new external financing flows, although these flows will also lead to a renewed widening of the CAD.”

‘Fiscal Deficits Remain Wide’

The agency said that they expect the consolidated general government (GG) fiscal deficit to widen to 7.6% of GDP in FY24, from an estimated 7.0% in FY23, driven by higher interest costs on domestic debt, which accounts for the difference between our forecast and a GG deficit of 7.1% of GDP in the revised FY24 budget statement (with a lower figure of 6.5% in the medium-term fiscal framework).

Fiscal consolidation will drive a slight improvement in our forecast GG primary deficit to 0.1% of GDP in FY24, from 0.5% of GDP in FY23.

High, Stable Debt Level

“The GG debt/GDP of 74% at FYE23 is in line with the median for ‘B’, ‘C’ and ‘D’ rating category sovereigns and debt dynamics are broadly stable owing to high nominal growth over the medium term. Nevertheless, debt/revenue (over 600%) and interest/revenue (nearly 60%) are far worse than that of peers,” it read.

‘Volatile Politics’

The agency noted that protests by Pakistan Tehreek-e-Insaf (PTI) supporters were sharply intensified in May as the PTI chief was briefly arrested on corruption charges.

“In the ensuing crackdown, a large number of PTI members were arrested, with several high-ranking PTI politicians quitting politics. Nevertheless, the enduring popularity of PTI chief and his political party create policy uncertainty around elections,” stated Fitch.