- Fitch says the IMF deal risks proving inadequate.
- It states that Pakistan needs additional financing over and above the IMF outlay.
- Moody’s says that the government will be challenged by political, social pressures.
KARACHI: Pakistan’s agreement with the International Monetary Fund (IMF) for a $3 billion stand-by arrangement (SBA) will bring some relief to its strained public finances, but the country faces significant obstacles to maintaining economic stability and growth. face, Moody’s Investors Service and Fitch said on Monday.
“Pakistan will require significant additional financing in addition to IMF disbursements to meet its debt maturities and economic recovery,” said Krisjanis Krustins, sovereign director for APAC at Fitch.
“While the IMF has sought and received assurances for such financing, there is a risk that this may prove insufficient, especially if the current account deficit widens again.”
Moody’s said in an analyst report that the IMF deal, which is subject to approval by the Fund’s executive board, will support Pakistan’s efforts to implement reforms that will strengthen its macroeconomic resilience over the long term.
Moody’s analyst Grace Lim said, “The SBA’s approval will modestly reduce Pakistan’s government liquidity risk over the next few months, as the disbursement of IMF financing will also encourage financing from other bilateral and multilateral partners.”
However, the ratings agency cautioned that the government’s ability to maintain the pace of reform, especially through measures to raise revenue and secure external financing, will be tested by political and social pressures ahead of elections due in October 2023.
“Pakistan’s government liquidity risk remains very high,” Lim said. “It is uncertain whether the Pakistani government will be able to secure the full $3 billion of IMF financing over the course of the nine-month SBA program.”
Pakistan’s economy has been hit by the coronavirus pandemic, floods, high inflation and social unrest.
The country’s foreign exchange reserves stand at a meager $3.5 billion as of June 16, while its external debt payments will remain high for the next few years, with an outstanding of around $25 billion in fiscal year 2024.
“While the IMF SBA has eased some of the near-term pressures on Pakistan, there is still high uncertainty about Pakistan’s external funding prospects for the remainder of fiscal year 2024 and beyond. “Pakistan’s sovereign liquidity risk remains very high,” the analyst said.
Economic activities in Pakistan are likely to remain slow in the near future.
“Ongoing economic difficulties due to the consequences of the floods, coupled with worsening social tensions, will continue to impact economic activity. “Elevated external liquidity pressures, limited fiscal space, slowing impact of central bank policy rate hikes and higher inflation will also constrain domestic and government spending as well as business investment,” the analyst said.
Moody’s said the IMF deal would help unlock financing from other bilateral and multilateral partners, thereby easing some of the near-term pressure on Pakistan.
However, the country will need a long-term external financing plan to meet its large financing requirements for the next few years, which may require another IMF program after the elections.
“It may come in the form of another IMF programme. However, whether Pakistan will join any other IMF program can be clear only after the elections.
Negotiations for any future IMF program will also take some time, even if they are successful,” Lim said.
“Unless a new program is agreed upon, Pakistan’s ability to secure credit from other bilateral and multilateral partners on a long-term basis will be severely constrained.”
Last month, Moody’s warned that Pakistan could default without an IMF bailout as its financing options remained uncertain after June.
Thus, reaching out to the SBA proved to be a major achievement for the government, with the stock market making historic day-to-day gains and the currency market stabilizing after months.
According to the IMF, the staff-level agreement is subject to approval by the IMF Executive Board, which is expected to be considered by mid-July.
Originally published in news