Pakistans Political Uncertainty Clouds IMF Deal Prospects, Warns Fitch

Global ratings agency Fitch has cautioned that the close outcome of Pakistan's recent elections and the resulting political uncertainty may hinder the country's efforts to secure a financing agreement with the International Monetary Fund (IMF).

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IMF Deal Crucial for Pakistan's Credit Profile

According to Fitch, a new IMF deal is essential for Pakistan's credit profile, as the current Stand-By Arrangement (SBA) expires in March. Last month, Pakistan received a second tranche of over USD 700 million from the IMF under the existing USD 3 billion SBA agreed upon in June 2022.

External Liquidity Stress and Default Risk

Fitch emphasizes that while Pakistan's external position has improved, with net foreign reserves of USD 8 billion as of February 9, it remains low compared to projected external funding needs. The agency estimates that Pakistan met less than half of its USD 18 billion funding plan in the first two quarters of the fiscal year ending June 2024, excluding routine rollovers of bilateral debt.

Securing Financing a Priority for New Government

Fitch highlights the urgency for the next government, likely a coalition of the Pakistan Muslim League-Nawaz (PML-N) and Pakistan Peoples Party (PPP), to secure financing from multilateral and bilateral partners. Negotiating a successor deal to the SBA and adhering to policy commitments will be critical for external financing flows and the country's long-term economic trajectory.

Challenges in Finalizing New IMF Deal

Fitch anticipates challenges in finalizing a new IMF deal, as the current SBA is an interim package and any successor arrangement may come with tougher conditions. However, the agency assumes that resistance to these conditions will be overcome given Pakistan's acute economic challenges and limited alternatives.

Political Instability and Reform Implementation

Fitch warns that continued political instability could prolong discussions with the IMF, delay assistance from other partners, or hamper reform implementation. The agency believes a government will engage with the IMF relatively quickly, but risks to political stability remain high, particularly if former prime minister Imran Khan's party remains sidelined.

Pakistan's Track Record with IMF Programs

Fitch notes Pakistan's poor record in completing IMF programs, with less than half of the country's 24 IMF programs disbursing over 75% of the available funding. However, the agency acknowledges fair progress under the current SBA and perceives a stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor arrangement.

Policy Risks and Structural Weaknesses

Fitch warns that policy risks could rise if external liquidity pressure eases, leading to the renewed buildup of economic and external imbalances. The agency believes Pakistan's external finances will remain structurally weak until it develops a private sector capable of generating significantly more export income, attracting foreign direct investment, or reducing import dependence.

Fitch's report highlights the challenges Pakistan faces in securing an IMF deal and the risks associated with political uncertainty. The formation of a stable government and the ability to implement reforms will be crucial for the country's economic stability and long-term growth.