Political uncertainty may complicate Pakistan’s efforts for IMF deal

Fitch Ratings suggests that the narrow outcome of Pakistan’s recent election and the ensuing short-term political uncertainty might complicate the nation’s efforts to secure a financing deal with the IMF, aiming to replace the expiring Stand-By Arrangement (SBA) by March 2024.

The credit rating agency emphasizes the importance of a “new deal” for Pakistan’s credit profile, assuming that one will be reached within a few months.

However, prolonged negotiations or failure to secure an agreement could heighten external liquidity pressure and increase the likelihood of default.

While Pakistan’s external position has seen improvement lately, with the State Bank of Pakistan reporting net foreign reserves of USD 8.0 billion as of February 9, 2024, up from USD 2.9 billion on February 3, 2023, this remains low compared to projected external funding requirements.

It’s anticipated that funding needs will continue to surpass reserves for the foreseeable future. Only a fraction of Pakistan’s USD 18 billion funding plan for the first two quarters of fiscal year 2024 has been met, excluding routine debt rollovers.

Given Pakistan’s precarious external position, securing financing from multilateral and bilateral partners will be a pressing concern for the incoming government, expected to be a coalition of the Pakistan Muslim League-Nawaz party and Pakistan People’s Party, despite the strong showing by Pakistan Tehreek-e-Insaf (PTI) candidates in the election.

Negotiating a successor agreement to the SBA and adhering to its policy commitments will be crucial not only for IMF funding but also for other external financing sources, significantly influencing Pakistan’s long-term economic trajectory.

While finalizing a new IMF deal is anticipated to be challenging, Fitch believes that any resistance to tougher conditions in a successor arrangement will ultimately be overcome, given Pakistan’s severe economic challenges and limited alternatives.

Fitch also notes that ongoing political instability could potentially prolong discussions with the IMF, delay assistance from other partners, or impede reform implementation.

However, they anticipate a relatively swift formation of a new government and engagement with the IMF, although risks to political stability are expected to persist, especially if PTI remains sidelined, as the election indicated continued strong public support for the party.