Pakistan’s polls results highlights risks to IMF deal, warns Fitch

Fitch Ratings on Monday warns that deteriorating political situation in Pakistan and uncertainty surrounding formation of new government after General Elections is hurting Islamabad’s efforts of securing new IMF deal.

“A new deal is key to the country’s credit profile, and we assume one will be achieved within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default,” read the report.

Pakistan’s external position has improved in recent months, with the State Bank of Pakistan reporting net foreign reserves of USD8.0 billion as of 9 February 2024, up from a low of USD2.9 billion on 3 February 2023.

“We estimate Pakistan met less than half of its USD18 billion funding plan in the first two quarters of the fiscal year ending June 2024 (FY24), excluding routine rollovers of bilateral debt,” it said.

It said that securing financing from multilateral and bilateral partners will be one of the most urgent issues on the agenda for the next government.

“This looks set to be a coalition of the Pakistan Muslim League-Nawaz party and Pakistan People’s Party, despite the strong performance by candidates associated with Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) party in the election.”

Negotiating a successor deal to the Stand-By Arrangement and adhering to the policy commitments under it will be critical to most other external financing flows, not just from the IMF, and will strongly influence the country’s economic trajectory in the longer term, Fitch highlighted.

The financial watchdog said that finalising new IMF deal is likely to be challenging.

The current SBA is an interim package and we believe any successor arrangement would come with tougher conditions, which may be resisted by entrenched vested interests in Pakistan.

“Nonetheless, we assume any resistance will be overcome, given the acute nature of the country’s economic challenges and the limited alternatives,” it said.

Continued political instability could prolong any discussions with the IMF, delay assistance from other multilateral and bilateral partners, or hamper the implementation of reforms.

“We believe a government will assume office and engage with the IMF relatively quickly, but risks to political stability are likely to remain high. Public discontent could rise further if PTI remains sidelined – the election revealed continued strong public support for the party,” it warned.