‘IMF’s new SDR allocation to boost Pakistan’s reserves by $2.8bln’

KARACHI: Pakistan is expected to get $2.8 billion from the International Monetary Fund (IMF) under a new allocation of special drawing rights for frontier markets and improving external position reduces downside risks to the country’s credit ratings, Fitch Ratings said on Monday.

“All six frontier markets should benefit from the expected new allocation of special drawing rights by the IMF. Most notably, it could bolster Sri Lanka’s reserves by $780 million and by $2.8 billion in Pakistan,” Fitch Ratings said in a report. “We expect the IMF’s board of governors to approve the allocation in August.”

The index provider Morgan Stanley Capital International proposed reclassifying the MSCI Pakistan Index from emerging to frontier markets with the final decision expected in September.

Analysts are expecting the decision to be positive for the market in the long run. “Pakistan fits well in the FM space, both in terms of size and stage of economic development,” Intermarket Securities said in a report.

External liquidity strains ease in Pakistan. In the last six months, official reserves have increased. The country has benefited from the disbursement of IMF resources under its $6 billion extended fund facility with the completion of the combined second through fifth reviews last March, and more recently from Saudi Arabia’s agreement in June to an oil assistance package that could be worth up to $1.5 billion. The country raised $2.5 billion in bonds in the international market in March.

“In Pakistan, the government’s adherence to a market-determined exchange-rate regime will continue to serve as a shock-absorber, and should help keep the current-account deficit contained,” said Fitch Ratings.

Fitch Ratings affirmed Pakistan’s long-term foreign-currency issuer default rating at ‘B-‘ with a stable outlook that reflects weak public finances, external finance vulnerabilities, and low governance indicator scores.

Fitch forecasts official foreign exchange reserves to reach $17.4 billion – 3.2 months of current external payments by the end of the fiscal year to June 2021 from $13.3 billion at FYE20. Reserves are expected to rise to $22.3 billion by FY22, including a planned $2.8 billion boost from the IMF’s special drawing rights allocation.

“We project that Pakistan's current account deficit will narrow to 0.5 percent of GDP in FY21, from 1.7 percent in FY20, due to a surge in remittance inflows, import compression, and low average oil prices” Fitch said in a statement in May.