IMF Deal
Fitch Ratings has expressed concern over the close outcome of Pakistan’s recent election, suggesting that the resulting political uncertainty may complicate the nation’s efforts to secure a new financing agreement with the International Monetary Fund (IMF).
The Stand-By Arrangement (SBA), set to expire in March 2024, requires a successor deal to maintain Pakistan’s credit profile. Fitch assumes a new agreement will be achieved within a few months but warns that prolonged negotiations or failure could heighten external liquidity stress and increase the risk of default.
Despite recent improvements in Pakistan’s external position, with foreign reserves reaching $8.0 billion as of February 9, 2024, challenges persist. Fitch estimates that Pakistan met less than half of its $18 billion funding plan for the fiscal year ending June 2024, raising concerns about external financing needs exceeding reserves for the next few years.
The political landscape is expected to feature a coalition government led by the Pakistan Muslim League-Nawaz and Pakistan People’s Party, navigating economic challenges.
The negotiation of a successor deal to the SBA is anticipated to be challenging, with potential resistance to tougher conditions. Political instability could prolong discussions, delay assistance, or hinder reform implementation. Despite expectations of swift government engagement with the IMF, risks to political stability remain high, particularly if the Pakistan Tehreek-e-Insaf party remains sidelined, given its strong public support.
Fitch acknowledges progress under the current SBA but underscores the historical challenge of completing IMF programs in Pakistan. The country’s external finances are likely to remain structurally weak until it develops a more robust private sector capable of generating increased export income or attracting foreign direct investment.
Policy risks may resurface if external liquidity pressures ease prematurely, leading to renewed economic imbalances. Fitch emphasizes the critical role of sustained reforms in addressing Pakistan’s economic challenges in the longer term.
