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As a result of the country’s staff-level agreement (SLA) with the International Monetary Fund (IMF), global rating agency Fitch has raised Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from “CCC-” to “CCC.” This upgrade reflects the country’s improved external liquidity and funding conditions.
Fitch upgrades Pakistan’s rating: The rating agency raised Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) following the staff-level agreement with the IMF on a nine-month Stand-by Arrangement (SBA) in June.
The rating agency added, “We expect the IMF board to approve the SLA in July, which will catalyze other funding and anchor policies around parliamentary elections due in October.” However, program implementation and external funding still carry risks, considering the unstable political environment and substantial external financing requirement.
Pakistan and the International Monetary Fund (IMF) reached a crucial $3 billion staff-level agreement on June 30. The International Monetary Fund (IMF) announced the successful negotiation of a “Stand-By Arrangement” worth $3 billion for 9 months with Pakistan.
This deal will receive final approval from the IMF executive board, which is anticipated to happen in mid-July. Following this permission, Pakistan would be able to borrow $3 billion.
Fitch pointed out that Pakistan has lately taken action to address issues with inadequate government revenue collection, energy subsidies, and regulations that are at odds with a market-determined exchange rate, such as import financing limitations. Prior to its expiration in June, these problems delayed the final three evaluations of Pakistan’s previous IMF programme.
It also noted that, after new tax policies and subsidy reforms in February, the government most recently revised its proposed budget for the fiscal year (FY) ending in June 2024 (FY24) to include new revenue initiatives and reduce spending.
“The authorities appeared to stop managing exchange rates in January 2023, but import prioritisation rules were only lifted in June,” it continued.
The New York-based organisation noted that Pakistan has a long history of breaking its obligations to the IMF in regards to implementation risks. According to what we gather, the government has already implemented all necessary SBA-related policy changes.
However, it added, “there is still room for implementation delays and difficulties, new policy errors ahead of the October elections, and doubt over the post-election commitment to the programme.
Fitch expects that the IMF executive board’s approval of the SLA will lead to an immediate disbursement of USD 1.2 billion, with the remaining USD 1.8 billion scheduled for reviews in November and February 2024.
After the IMF deal, the authorities anticipate receiving another USD 3-billion in fresh international money, including another USD 3 billion in deposits from Saudi Arabia and the United Arab Emirates.
The SBA will facilitate the disbursement of a portion of the USD 10 billion in aid pledged at the flood relief conference in January 2023, with a focus on project loans (USD 2 billion in the budget).
The agency stated the following in regards to the overall funding goals: “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.”
Although some of the loans that were not renewed in FY23 may now be due, the government funding target calls for USD 1.5 billion in market issuance and USD 4.5 billion in commercial bank borrowing, both of which may be difficult to achieve. Deposits from China, Saudi Arabia, and the UAE that are maturing will probably total USD9 billion.
According to the report, Pakistan’s current account deficit (CAD) has significantly decreased as a result of earlier import and foreign exchange limitations, stricter fiscal and economic policies, initiatives to reduce energy use, and reduced commodity prices.
In March to May 2023, Pakistan reported current account surpluses, and we project a CAD of around $4 billion (1% of GDP) in FY24, up from $ 3 billion in FY23 and over $17 billion in FY22. On the premise that not all of the anticipated extra funds will materialise, limiting imports, our forecast CAD is lower than the USD6 billion in the budget.
The statement highlighted that Pakistan has significantly narrowed its current account deficit (CAD) due to earlier restrictions on imports and FX availability, tighter fiscal and economic policies, measures to limit energy consumption, and lower commodity prices.
Pakistan reported current account surpluses in the months of March through May of 2023, and we project a CAD of over $4 billion (1% of GDP) in FY24, up from $ 3 billion in FY23 and over $17 billion in FY22. Assuming that not all of the anticipated extra financing would materialise and limit imports, our prediction for CAD is lower than the USD6 billion in the budget.
Reserves remain low.
According to Fitch, the State Bank of Pakistan’s liquid net foreign exchange reserves have been fluctuating at USD4 billion since February 2023, or less than a month’s worth of imports, down from a peak of over USD20 billion at the end of August 2021.
“The decline in reserves was due to significant CADs, service of external debt, and earlier central bank FX intervention. On the back of fresh external finance flows, we anticipate a small recovery for the remainder of FY24, while these flows will also contribute to a further widening of the CAD.
Fiscal Deficits Continue to Be Wide
According to the agency, the higher interest costs on domestic debt will cause the consolidated general government (GG) fiscal deficit to widen to 7.6% of GDP in FY24 from an estimated 7.0% of GDP in FY23. The agency attributes the difference between our forecast and the revised FY24 budget statement’s GG deficit of 7.1% of GDP (with a lower figure of 6.5% in the medium-term fiscal framework) to the higher interest costs on domestic debt.
Our projected GG primary deficit will somewhat improve due to fiscal consolidation, going from 0.5% of GDP in FY23 to 0.1% of GDP in FY24.
High and Constant Debt Level
“The GG debt/GDP ratio of 74% at FYE23 is in line with the median for ‘B’, ‘C’, and ‘D’ rating category sovereigns, and debt dynamics are generally stable due to high nominal growth over the medium term. However, the ratios of debt to revenue (over 600%) and interest to revenue (almost 60%) are significantly higher than those of peers,” it stated.
Politically volatile
In May, the outlet observed a significant increase in demonstrations by supporters of Pakistan Tehreek-e-Insaf (PTI) following the brief detention of the PTI leader on suspicion of corruption.
“In the subsequent crackdown, many PTI members were detained, and some high-ranking PTI lawmakers resigned from the party. However, the PTI leader’s and his political party’s continued popularity lead to uncertainties in election-related policy, according to Fitch.