Fitch upgrades Pakistan’s sovereign rating after IMF deal

KARACHI: International credit rating agency Fitch has upgraded Pakistan’s long-term foreign currency issuer default rating (IDR) on improved external liquidity and funding conditions as the country reached a deal with the IMF on a nine-month stand-by arrangement (SBA).

Moving the rating a notch up, the rating agency has upgraded Pakistan to ‘CCC’ from the previous ‘CCC-’ assigned back in February 2023. Typically, the agency does not assign outlooks to sovereigns with a rating of ‘CCC+’ or below.

The upgrade reflects Pakistan’s improved external liquidity and funding conditions following its staff-level agreement (SLA) with the IMF on a nine-month SBA worth $3 billion.

Federal Finance Minister Ishaq Dar in a tweet wrote, “Another positive news towards current economic revival journey, alhamdulillah.”

The 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, catalysing other funding and anchoring policies around parliamentary elections due by October. Nevertheless, programme implementation and external funding risks remain due to a volatile political climate and large external financing requirements,” the agency said.

The approval from the credit rating agency came through because Islamabad has shown a willingness to follow through on IMF-driven reforms.

Pakistan has recently taken measures to address shortfalls in government revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate, including import financing restrictions.

These issues held up the last three reviews of Pakistan’s previous IMF programme, before its expiry in June.

The government amended its proposed budget for FY24 to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February.

Pakistan also let go of exchange rate management in January 2023, although guidelines on prioritizing imports were only removed in June.

However, Fitch pointed out that Pakistan had an extensive record of going off-track on its commitments to the IMF.

“We understand the government has already made all the required policy actions under the SBA. Nevertheless, there is still scope for delays and challenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election commitment to the programme.”

Once the IMF board approves the SBA, it would disburse $1.2 billion, while the disbursal of the remaining $1.8 billion would happen after reviews in November 2023 and February 2024.

Saudi Arabia and the UAE have committed another $3 billion in deposits, and the authorities expect $3-5 billion in other new multilateral funding after the IMF agreement.

The SBA should also facilitate disbursement of some of the $10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans ($2 billion in the budget).

Authorities expect $25 billion in gross new external financing in FY24, against $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral creditors.

The government funding target includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which could prove challenging, although some of the loans not rolled over in FY23 could now return.

It also pointed out the likelihood of the rollover of $9 billion in maturing deposits from China, Saudi Arabia and the UAE in FY23.

Although import restrictions and other measures helped the country narrow its current account deficit (CAD), Fitch forecast a CAD of about $4 billion (1 percent of GDP) in FY24, after $3 billion in FY23 and over $17 billion in FY22.

“Our forecast CAD is lower than $6 billion in the budget, on the assumption that not all of the planned new funding will materialise, constraining imports,” it said, adding that it could still widen more than expected, given continued reports of import backlogs, the dependence of the manufacturing sector on foreign inputs, and reconstruction needs after last year’s floods.

Nevertheless, currency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after partly switching to unofficial channels to benefit from more favourable parallel market exchange rates.

The ‘CCC’ rating also reflected Pakistan’s low reserves of around $4 billion since February 2023, political volatility since the May protests supporting former PM Imran Khan, and high fiscal deficits, which could widen to 7.6 percent of GDP in FY24 from 7 percent in FY23.