KARACHI: International credit rating agency Fitch has upgraded Pakistan’s long-term foreign currency issuance default rating (IDR) on improved external liquidity and funding conditions as the country entered into a nine-month standby arrangement with the IMF. SBA) is contracted.
Taking the rating up a notch, the rating agency has upgraded Pakistan to ‘CCC’ from the previous ‘CCC-‘ assigned in February 2023. Generally, the agency does not assign an outlook to sovereigns rated ‘CCC+’ or below.
The upgrade reflects Pakistan’s improved external liquidity and funding conditions following the Staff Level Agreement (SLA) on the $3 billion nine-month SBA with the IMF.
Federal Finance Minister Ishaq Dar wrote in a tweet that “Another positive news regarding the current journey of economic recovery, Alhamdulillah”.
The Federal Minister also congratulated Prime Minister Shehbaz Sharif, the people of Pakistan, government allies and his economic team.
“We expect the SLA to be approved by the IMF board in July, triggering other funding and anchoring policies around parliamentary elections due in October. However, the volatile political environment and major external Risks to program implementation and external funding remain due to financing requirements,” the agency said.
The approval by the credit rating agency comes as Islamabad has shown its willingness to implement IMF-driven reforms.
Pakistan has recently taken steps to address the shortfall in government revenue collection, energy subsidies and policies inconsistent with market-based exchange rates, including import fiscal restrictions.
These problems had hampered the last three reviews of Pakistan’s previous IMF program before it expired in June.
The government revised its proposed budget for FY24 to include new revenue measures and spending cuts following additional tax measures and subsidy reforms in February.
Pakistan also abandoned the exchange rate regime in January 2023, although guidelines on prioritizing imports were only lifted in June.
However, Fitch pointed out that Pakistan has an extensive record of reneging on its commitments to the IMF.
“We believe that the government has already taken all the required policy steps under the SBA. However, there are still delays and implementation challenges, as well as new policy mistakes and elections for the program ahead of the October elections. There is room for uncertainty on the latter commitment.
Once the IMF Board approves the SBA, it will disburse $1.2 billion, while the remaining $1.8 billion will be disbursed following reviews in November 2023 and February 2024.
Saudi Arabia and the United Arab Emirates have pledged another $3 billion in reserves, and officials expect $3 to $5 billion in other multilateral funding after the IMF deal.
The SBA should also facilitate the disbursement of some of the $10 billion in aid commitments made at the January 2023 flood relief conference, mostly in the form of project loans ($2 billion in the budget).
Officials expect total new external financing of $25 billion in FY24, compared to public debt maturities of $15 billion, including $1 billion in bonds and $3.6 billion from multilateral lenders. are
The government’s funding target includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which may prove challenging, although some loans not repaid in FY23 may now be repaid. .
It also pointed to a potential rollover of $9 billion in maturing deposits from China, Saudi Arabia and the UAE in FY23.
Although import restrictions and other measures have helped the country narrow its current account deficit (CAD), Fitch expects the deficit to fall to around $4 billion (1 percent of GDP) in FY24, $3 billion in FY23. and forecast over $17 billion in FY22.
“Our forecast CAD budget of less than $6 billion, on the assumption that all planned new funding will not materialize, will hamper imports,” it said, adding that import backlogs continued to increase. According to reports, it may increase more than expected. , the dependence of the manufacturing sector on foreign inputs, and the need to rebuild after last year’s floods.
Even so, currency depreciation could limit growth, as authorities intend to finance imports through banks, without resorting to government reserves. Remittance inflows may also recover after a partial switch to unofficial channels to take advantage of the more favorable parallel market exchange rate.
The ‘CCC’ rating also reflects Pakistan’s low reserves of around $4 billion since February 2023, political volatility since the May protests in support of former Prime Minister Imran Khan, and a high fiscal deficit. , which may increase to 7.6 percent of GDP in FY24 from 7 percent in FY23. .
