Fitch, Moody’s warn of economic risks

Financial sustainability still under threat as Pakistan has to repay $25b

Fitch Ratings and Moody’s Investors Service on Monday warned of continued threat to Pakistan’s financial sustainability, despite the country receiving a much-needed $3 billion lifeline from the International Monetary Fund (IMF) over the weekend.

Pakistan signed a short-duration (nine-month) $3 billion loan agreement with the IMF last week, following the revival of a $7 billion programme, which was ending prematurely on June 30.

The agreement is expected to make the required foreign exchange available for reopening imports, helping listed companies to gradually resume full operations at their partially closed production plants, and re-energise economic activities in the country.

The new programme signals that other donor agencies and friendly countries will extend fresh financing to Islamabad as they pledged $9 billion at a Geneva meeting in January 2023. But the two global rating agencies reminded of continued risks to Pakistan’s economy as the government stared at $25 billion debt payment in the year that began on July 1.

“Pakistan will require significant additional financing besides the IMF disbursements to meet its debt maturities and finance an economic recovery,” Krisjanis Krustins, Director of Sovereigns for APAC at Fitch, told Bloomberg.

“While the IMF likely sought and received assurances for such financing, there is a risk that this could prove insufficient, particularly if current account deficits widen again.”

In order to secure the initial agreement with the IMF, Pakistan had to increase taxes, cut spending, and raise its key policy rate to a historic high. Although the initial agreement was welcomed by markets, helping stocks to surge significantly and dollar bonds to enjoy their best run, it is still awaiting approval from the IMF executive board.

Grace Lim, an analyst at Moody’s in Singapore, told Bloomberg that “It is uncertain that the Pakistani government will be able to secure full $3 billion of IMF financing during the nine-month standby arrangement programme.”

The government’s commitment to continually implement reforms will be tested as it goes into elections due by October 2023, she said.

The towering $25 billion debt payment includes both principal and interest, which is nearly seven times Pakistan’s foreign exchange reserves, as per Moody’s.

Lim said that it would only be clear after elections whether the country will be able to join another IMF programme.

“Until a new programme is agreed, Pakistan’s ability to secure loans from other bilateral and multilateral partners on an ongoing basis over the longer term will be severely constrained,” she warned.

 

Published in The Express Tribune, July 4^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.