KARACHI: Pakistan’s $3 billion Standby Arrangement (SBA) deal with the International Monetary Fund (IMF) will provide some relief to its strained public finances, but the country’s economic stability and growth will remain unchanged. face significant hurdles to sustaining, Moody’s Investors Service and Fitch said Monday.
“Pakistan will need significant additional financing in addition to IMF disbursements to meet its debt maturities and economic recovery,” said Chris Johns Christiansen, APAC independent director at Fitch.
“While the IMF has likely sought and received assurances for such financing, there is a risk that this may prove insufficient, particularly if the current account deficit widens again.”
Moody’s said in an analyst report that the IMF deal, which is subject to approval by the fund’s executive board, will support Pakistan’s efforts to implement reforms that will strengthen its long-term macroeconomic resilience. will strengthen
Moody’s analyst Grace Lim said, “The approval of the SBA will moderate Pakistan’s government liquidity risk over the next few months, as IMF financing is likely to be provided by other bilateral and multilateral partners.” It will also mobilize funding from the
However, the rating agency warned that the government’s ability to maintain the pace of reforms, particularly revenue-raising measures, and secure external financing will be tested by political and social pressure ahead of elections due in October 2023.
“The risks to the liquidity of the government of Pakistan are very high,” Lim said. “It is uncertain whether the government of Pakistan will be able to receive the full $3 billion in IMF financing during the nine-month SBA program.”
Pakistan’s economy has been badly affected by the coronavirus pandemic, floods, high inflation and social unrest.
The country’s foreign exchange reserves are very low at $3.5 billion as of June 16, while its external debt repayments will remain high for the next few years, with about $25 billion due in fiscal year 2024.
“While the IMF SBA eases some near-term pressure on Pakistan, there is still considerable uncertainty about Pakistan’s external funding prospects for the remainder of fiscal 2024 and beyond. The analyst said Pakistan’s Government liquidity risks are high.
Economic activity in Pakistan is likely to remain low in the near future.
“Ongoing economic difficulties due to the effects of the floods will continue to drag down economic activity, further exacerbating social tensions. External liquidity pressures, tight financial space, the central bank’s policy rate will continue to drag on economic activity,” the analyst added. The knock-on effects of rising inflation and high inflation will constrain household and government spending as well as business investment.
Moody’s said the IMF deal would help unlock financing from other bilateral and multilateral partners, easing some of the near-term pressure on Pakistan.
However, the country will need a long-term external financing plan to meet its large financing needs for the next few years, which may require another IMF program after the elections.
“It may come in the form of another IMF program. However, whether Pakistan will join another IMF program or not, it may be clear only after the elections.
Negotiations for any future IMF program will take some time, even if they are successful,” Lim said.
“Unless a new program is agreed upon, Pakistan’s ability to access loans from other bilateral and multilateral partners on a long-term basis will be severely limited.”
Last month, Moody’s warned that Pakistan could default without an IMF bailout as its financing options after June remain uncertain.
Thus, reaching the SBA proved to be a huge success for the government, with the stock market making historic gains throughout the day and the currency market stabilizing after months.
According to the IMF, the staff-level agreement is subject to approval by the IMF’s Executive Board, which is expected to be considered by mid-July.
