FeaturedNationalVOLUME 18 ISSUE # 34

Initial indicators of a remote rebound

Pakistan’s long-term foreign currency issuer default rating (IDR) received a boost as global rating agency Fitch upgraded it. The upgrade was a result of improved external liquidity and funding conditions attributed to the recent staff-level agreement between Pakistan and the International Monetary Fund (IMF).

Pakistan secured a crucial $3 billion short-term financial package from the IMF, which provided much-needed relief to its economy on the brink of default. The upgrade of Pakistan’s foreign currency issuer default rating reflects positive developments in the country’s external liquidity and funding conditions. The recent agreement with the IMF and the financial package obtained have alleviated some of the economic pressures faced by Pakistan. However, challenges remain, including the implementation of IMF-driven reforms, external funding risks, and a volatile political climate. It is important for Pakistan to continue addressing its fiscal and economic challenges while maintaining a stable and supportive policy environment to sustain its progress and attract further funding.

Fitch stated that they anticipate the SBA to be approved by the IMF board in July, which would catalyze additional funding and solidify policies in preparation for parliamentary elections scheduled for October. The rating agency also acknowledged the government’s implementation of IMF-driven reforms to address issues such as government revenue collection shortfalls, energy subsidies, and policies inconsistent with a market-determined exchange rate, including import financing restrictions. However, it cautioned that risks related to the implementation of the IMF programme and external funding persist due to a volatile political climate and substantial external financing requirements. They noted that these issues have previously caused delays in the reviews of Pakistan’s previous IMF programme, which expired in June.

Fitch highlighted recent measures taken by the government, such as introducing new revenue measures, reducing spending, and abandoning exchange-rate management. They noted that guidelines on prioritizing imports were removed in June, indicating a shift in policies. However, it emphasized Pakistan’s track record of deviating from its commitments to the IMF and expressed concerns about potential delays, implementation challenges, policy missteps, and uncertainties surrounding post-election commitments to the programme, given the upcoming October elections.

If the IMF board approves the SBA, an immediate disbursement of $1.2 billion will be unlocked, with the remaining $1.8 billion scheduled for disbursement after reviews in November and February 2024. Additionally, Saudi Arabia and the United Arab Emirates have committed $3 billion in deposits, and Pakistan expects to receive $3-5 billion in new multilateral funding following the IMF agreement. The SBA is also expected to facilitate the disbursement of some of the $10 billion in aid pledges made at the January 2023 flood relief conference, primarily in the form of project loans, including $2 billion in the budget.

Regarding external financing, Fitch mentioned that Pakistani authorities anticipate $25 billion in gross new external financing in FY24, which includes $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral creditors. The government aims to achieve this funding target through market issuance ($1.5 billion) and commercial bank borrowing ($4.5 billion). However, the global rating agency acknowledged that both sources of funding could pose challenges, although there is a possibility of some loans not rolled over in FY23 being reinstated. The agency also anticipated the rollover of $9 billion in maturing deposits from China, Saudi Arabia, and the UAE, as was the case in FY23. Pakistan’s current account deficit (CAD) has significantly narrowed due to import restrictions, tighter fiscal and economic policies, energy consumption limitations, and lower commodity prices. Pakistan recorded current account surpluses in March-May 2023, and Fitch forecasts a CAD of approximately $4 billion (1% of GDP) in FY24, following a CAD of $3 billion in FY23 and over $17 billion in FY22. Its forecast CAD is lower than the $6 billion outlined in the budget, assuming that not all planned new funding will materialize, thereby limiting imports. The agency also highlighted risks associated with the external deficit, suggesting that the CAD could widen beyond their expectations due to import backlogs, the manufacturing sector’s reliance on foreign inputs, and the need for post-flood reconstruction.

Nonetheless, it stated that currency depreciation could mitigate the rise in the CAD since the authorities intend to finance imports through banks rather than relying on official reserves. They also mentioned the possibility of remittance inflows recovering, as some remittances have shifted to unofficial channels to take advantage of more favorable exchange rates in the parallel market.

To summarize, Fitch’s decision to upgrade Pakistan’s foreign currency issuer default rating signifies an improvement in the country’s ability to meet its financial obligations in foreign currency. This upgrade is a result of positive factors such as enhanced external liquidity and improved funding conditions. These improvements can be attributed to the recent agreement between Pakistan and the IMF, which involved a nine-month Stand-by Arrangement (SBA) and a $3 billion short-term financial package. This agreement has provided Pakistan with much-needed relief, considering its economic struggles and the risk of default.

However, despite the upgrade, there are still challenges that Pakistan needs to address. It is important to implement the reforms outlined by the IMF and manage risks associated with external funding. Pakistan’s volatile political climate poses additional uncertainties that need to be managed effectively. To sustain the positive momentum, Pakistan must continue its efforts to address fiscal and economic issues. It is crucial for the country to maintain a stable and supportive policy environment while working towards meeting its commitments to the IMF programme. By doing so, Pakistan can attract further funding and support its ongoing economic development.