Fitch upgrades Pakistan’s currency issuer default rating on improvement in external financing

The Fitch Ratings logo can be seen above the main entrance to their office building.  Reuters/File
The Fitch Ratings logo can be seen above the main entrance to their office building. Reuters/File
  • Upgrade reflects Pakistan’s improved funding conditions after IMF deal: Fitch.
  • “We expect the SLA to be approved by the IMF Board in July.”
  • The agency says that the risk of external funding remains due to the unstable political environment.

Fitch Ratings has upgraded Pakistan’s long-term foreign currency issuer default rating (IDR) to ‘CCC’ from ‘CCC-‘ due to improvement in the country’s external liquidity following a short-term stand-by agreement with the International Monetary Fund (IMF). Have given. ,

In an official statement released on Monday, the global ratings agency said the upgrade reflects Pakistan’s improved external liquidity and funding conditions following its staff-level agreement (SLA) with the IMF on a nine-month stand-by arrangement (SBA) in June. it shows.

“We expect the SLA to be approved by the IMF Board in July, leading to other funding and anchoring policies around parliamentary elections due by October,” it added.

However, the rating agency said that IMF program implementation and external funding risks remain due to the volatile political environment and large external financing requirements.

Fitch Ratings also highlighted the measures taken by Pakistan to address shortfalls in government revenue collection, energy subsidies and policies inconsistent with market-determined exchange rates, including import financing restrictions. “These issues stalled three previous reviews of Pakistan’s previous IMF program before it expired in June.”

Recently, the global agency said the government in February revised its proposed budget for the fiscal year ending June 2024 (FY24) to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms. Amended the budget.

It added that the authorities abandoned the exchange rate management in January 2023, although the guidelines for prioritizing imports were removed in June itself.

implementation risk

The rating agency said that Pakistan has an extensive record of deviating from its commitments to the IMF. “We understand that the government has already taken all necessary policy actions under the SBA. Nevertheless, there is still scope for delays and challenges in implementation, as well as new policy missteps ahead of the October elections and uncertainty over post-election commitment to the programme,” it added.

Fitch Ratings said the IMF board’s approval of the SBA would lead to immediate disbursement of $1.2 billion, with the remaining $1.8 billion to be determined after a review in November and February 2024.

Saudi Arabia and the United Arab Emirates (UAE) have pledged to deposit an additional $3 billion, and officials expect $3–5 billion in other new multilateral funding following the IMF agreement.

“The SBA should also facilitate the delivery of some of the $10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans ($2 billion in the budget).”

ambitious funding goals

The rating agency said Pakistan expects $25 billion in gross new external financing in fiscal year 2024, while $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral lenders.

It said the government funding target included $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which could prove challenging, although some loans not returned in the previous financial year could now come back. In addition, as of FY2013, $9 billion in maturing deposits from China, Saudi Arabia and the United Arab Emirates are expected to return, the agency said.

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