According to Fitch Ratings, Pakistan may face difficulties in obtaining a financing agreement with the International Monetary Fund (IMF) to replace the Stand-By Arrangement (SBA), which is set to expire in March 2024, because of the highly contested outcome of the country’s most recent election and the political uncertainty that followed.
Fitch issued a warning on Monday, stating that discussions for a new finance agreement, which is essential to Pakistan’s credit standing, may become more difficult due to the country’s unstable political environment. Although Fitch believes that a deal will probably be struck in the upcoming months, the rating agency emphasized that protracted talks or a settlement that falls through might worsen external liquidity pressures and raise the default risk.
The State Bank of Pakistan reported net foreign reserves of $8 billion as of February 9, 2024, up from a low of $2.9 billion in February 2023. Despite recent improvements in Pakistan’s external position, Fitch observed that these reserves remain low relative to forecast external funding needs. With the exception of regular rollovers of bilateral debt, the agency calculated that in the first two quarters of the fiscal year ending in June 2024, Pakistan met less than half of its $18 billion funding plan.
Even though candidates affiliated with Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) party performed well in the election, Pakistan’s external position vulnerability highlighted the urgency of securing financing from multilateral and bilateral partners, making it a top priority for the incoming government, which is expected to be a coalition of the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).
Long-term economic growth in the country will be shaped by the negotiation of a replacement SBA agreement and adherence to its policy promises. This will affect not only IMF finance but also other external financial flows. Fitch admitted that it would be difficult to finalize a new IMF pact and predicted that any successor arrangement would face pushback from Pakistan’s powerful interests. Fitch, however, made the assumption that any opposition would probably be overcome by the severe economic difficulties the nation faces.
Prolonged political unrest may prolong talks with the IMF, postpone support from other allies, or make it more difficult to enact reforms. Although the new government is expected to interact with the IMF quickly, there is still a considerable danger to political stability, particularly if PTI is not given the support it deserves from the public, as demonstrated by the recent election.
Fitch noted that Pakistan has historically struggled to complete IMF plans, but it also notes that reasonable progress has been made under the current SBA. The rating agency observed that there was more agreement in Pakistan over the need for reform, which may make it easier to put in place a replacement agreement.
Fitch did, however, also issue a warning about possible policy risks in the event that external liquidity constraints abate and new economic and external imbalances begin to accumulate. The agency emphasized that unless significant progress is made in creating a private sector that can enhance export revenue, draw in foreign direct investment, or lessen reliance on imports, Pakistan’s external finances will probably continue to be fundamentally poor.
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