Next IMF bailout package will come with tougher conditions, says global ratings agency
Fitch Ratings has warned that political uncertainty following the February 8 elections may complicate Pakistan's efforts to secure a bailout package from the International Monetary Fund (IMF), as the current Stand-By Arrangement (SBA) is set to expire on next month.
A new deal is key to the country's credit profile, and the rating agency assumed it would be achieved within a few months, but prolonged negotiation or failure to achieve it would increase external liquidity stress and increase the probability of default, it said in your assessment.
Pakistan's external position has improved in recent months, with the State Bank of Pakistan reporting net foreign reserves of $8 billion as of February 9, 2024, up from a low of $2.9 billion on February 3. February 2023.
However, this is low relative to projected external financing needs, which we expect to continue to exceed reserves at least for the next few years.
“We estimate that Pakistan met less than half of its $18 billion financing plan in the first two quarters of the fiscal year ending June 2024 (FY24), excluding routine bilateral debt renewals,” the agency added. of qualification.
Fitch Ratings said the sovereign's vulnerable external position means that securing financing from multilateral and bilateral partners will be one of the most urgent issues on the next government's agenda.
'The PML-N and the PPP seem willing to form a coalition government'
It looks set to be a coalition of the Pakistan Muslim League-Nawaz party and the Pakistan People's Party, despite the strong performance of candidates associated with Imran Khan's Pakistan Tehreek-e-Insaf (PTI) party in the elections.
Negotiating a successor agreement to the SBA and adhering to the policy commitments derived from it will be essential for most other external financing flows, not just the IMF, and will strongly influence the country's economic trajectory in the long term.
Finalizing a new deal with the IMF is likely to be a challenge. The current SBA is an interim package and we believe that any successor deal would come with tougher conditions, which entrenched vested interests in Pakistan might resist. However, we assume that any resistance will be overcome, given the acute nature of the country's economic challenges and limited alternatives, the global ratings agency said.
Continued political instability could prolong any discussions with the IMF, delay assistance from other multilateral and bilateral partners, or hinder the implementation of reforms. We believe that a government will take over and engage with the IMF relatively quickly, but the risks to political stability are likely to remain high. Public discontent could rise further if the PTI remains on the sidelines: the elections revealed that the party still has strong public support, he added.
'Poor record'
The rating agency also highlighted the poor record of successive governments in completing IMF programs: less than half of its 24 IMF programs have disbursed more than 75% of available financing.
However, there has been considerable progress on the goals of the current SBA. Furthermore, we perceive that there is a stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor agreement.
Policy risks could rise again over time if external liquidity pressures ease, either as a result of initial reform successes or developments outside Pakistan, such as a substantial drop in oil prices.
This could lead to a new accumulation of economic and external imbalances. “We believe Pakistan's external finances will remain structurally weak until it develops a private sector that can generate significantly more export earnings, attract FDI or reduce dependence on imports,” Fitch said.
