Fitch upgrades Pakistan’s rating after IMF deal

Islamabad: Global rating agency Fitch on Monday upgraded Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) from 'CCC-' to 'CCC' following the country's improved external liquidity and funding conditions resulting from its staff-level agreement (SLA) with the International Monetary Fund (IMF).

The SLA, which involves a nine-month Stand-by Arrangement (SBA), was reached between Pakistan and the IMF in June. Fitch expects the SLA to receive approval from the IMF board in July, which will unlock further funding and solidify policies leading up to parliamentary elections scheduled for October.

While acknowledging the positive developments, Fitch highlighted potential risks associated with program implementation and external funding due to the volatile political climate and Pakistan's significant external financing requirements. The rating agency also mentioned Pakistan's history of deviating from its commitments to the IMF.

The SLA, once approved, will enable an immediate disbursement of USD 1.2 billion, with an additional USD 1.8 billion scheduled for release after reviews in November and February 2024. Pakistan has secured commitments of USD 3 billion in deposits from Saudi Arabia and the United Arab Emirates, and it anticipates receiving USD 3-5 billion in new multilateral funding after finalizing the IMF agreement. The SBA is also expected to facilitate the disbursement of aid pledged at the flood relief conference held in January 2023.

Fitch noted that Pakistan has taken steps to address issues such as revenue collection shortfalls, energy subsidies, and policies conflicting with a market-determined exchange rate. The country has amended its proposed budget for the fiscal year ending in June 2024 to introduce new revenue measures and reduce spending. The agency further emphasized the narrowing of Pakistan's current account deficit, driven by import restrictions, fiscal discipline, energy conservation measures, and lower commodity prices.

Despite these positive indicators, Fitch highlighted concerns regarding Pakistan's low foreign exchange reserves and high fiscal deficits. The agency expects the fiscal deficit to widen to 7.6% of GDP in FY24, primarily due to increased interest costs on domestic debt. Pakistan's debt dynamics are stable, but debt-to-revenue and interest-to-revenue ratios remain unfavorable compared to peer countries.

Fitch also raised awareness of the political volatility in Pakistan, noting intensified protests by supporters of the Pakistan Tehreek-e-Insaf (PTI) party and the resulting policy uncertainty surrounding upcoming elections. The agency mentioned the popularity of the PTI chief as a factor contributing to the uncertain political landscape.