ISLAMABAD: Progress on difficult structural reforms will be the key to upcoming International Monetary Fund (IMF) programme reviews and continued financing from other multilateral and bilateral lenders, says Fitch Ratings.
The rating agency in its latest report on Pakistan said that securing sufficient external financing remains a challenge, considering large maturities and lenders’ existing exposures.
The authorities budgeted for about $6 billion of funding from multilaterals, including the IMF, in fiscal year 2025, but about $4 billion of this will effectively refinance existing debt.
Aurangzeb confident as Pakistan awaits IMF review
There has been progress on fiscal reform, despite some setbacks. The primary fiscal surplus has outperformed IMF targets, although federal tax revenue grew less than required under the IMF’s indicative performance criterion in the first six months of fiscal year 2025. All provinces have recently legislated higher agricultural income taxes, a key structural condition of the EFF, although delays mean that the programme’s January 2025 implementation deadline for the reform was missed.
“In July, we noted that positive rating action could be driven by a sustained recovery in reserves and further significant easing of external financing risks, and/or implementation of fiscal consolidation in line with IMF commitments. Meanwhile, deteriorating external liquidity, for example linked to delays in IMF reviews, could lead to negative action, the Rating Agency noted.
Pakistan has continued to make headway restoring economic stability and rebuilding external buffers.
The State Bank of Pakistan (SBP)’s decision to cut policy rates to 12 percent on 27 January underscored recent progress in taming consumer price inflation, which fell to just over two percent year-on-year in January 2025, down from an average of nearly 24 percent in the fiscal year ended June 2024.
Rapid disinflation reflects fading base effects from earlier subsidy reforms and exchange rate stability, underpinned by a tight monetary policy stance, which in turn has subdued domestic demand and external financing needs.
Economic activity, having absorbed tighter policy settings, is now benefitting from stability and falling interest rates. We expect real value added to expand by three percent in fiscal year 2025. Growth in credit to the private sector turned positive in real terms in October 2024 for the first time since June 2022.
Strong remittance inflows, robust agricultural exports and tight policy settings have allowed Pakistan’s current account to move into a surplus of about $1.2 billion (over 0.5 percent of GDP) in the six months to December 2024, from a similarly sized deficit in fiscal year 2024.
“Foreign exchange market reforms in 2023 also facilitated the shift. When upgrading Pakistan’s rating to ‘CCC+’ in July 2024, we expected a slight widening of the current-account deficit in fiscal year 2025”, the rating agency added.
Forex reserves are set to outperform targets under Pakistan’s $7 billion IMF Extended Fund Facility (EFF) and Fitch’s earlier forecasts. Gross official reserves reached over $18.3 billion by end-2024, about three months of current external payments, up from around $15.5 billion in June.
Reserves remain low relative to funding needs. Over $22 billion of public external debt matures in the whole of fiscal year 2025. This includes nearly $13 billion in bilateral deposits, which we believe bilateral partners will roll over, as per their promises to the IMF. Saudi Arabia rolled over $3 billion in December and the UAE $2 billion in January.
“As we noted in recent research, we expect new bilateral capital flows to be increasingly commercial, and conditional on reforms. Discussions on the partial sale of the government’s stake in a copper mine to a Saudi investor exemplify such commercial flows. Pakistan and Saudi Arabia also recently agreed on a deferred oil payment facility”, it added.
A recently announced $20 billion 10-year framework with the World Bank Group appears broadly in line with this. The group’s current project portfolio is about $17 billion, and its net new yearly lending to Pakistan averaged around $1 billion over the past five years, it added.
Reuters adds: Pakistan’s external financing needs will remain significant in the coming year, despite progress in rebuilding its foreign exchange reserves, Fitch Ratings said on Thursday.
The South Asian nation needs to repay over $22 billion in external debt in the fiscal year 2025, including nearly $13 billion in bilateral deposits, Fitch said.
“Securing sufficient external financing remains a challenge, considering large maturities and lenders’ existing exposures,” said the credit ratings agency.
Last month, the country agreed on a $1 billion loan with two Middle Eastern banks at a 6-7% interest rate, its finance minister told Reuters in an interview on the sidelines of the World Economic Forum
Pakistan’s central bank chief earlier said the country aims to raise up to $4 billion from Middle Eastern commercial banks by the next fiscal year.
To address its external financing needs from the International Monetary Fund (IMF) and other multilateral and bilateral lenders, Fitch said Pakistan needs to continue implementing structural reforms, including those related to fiscal consolidation and improving its business environment.
Pakistan is undergoing reforms under a $7 billion IMF programme, which is up for its first review later this month. The programme aims to help Pakistan address deep-rooted economic issues such as its large fiscal and current account deficits.
“Deteriorating external liquidity, for example linked to delays in IMF reviews, could lead to negative action,” the ranting agency said.
Still, Fitch noted that Pakistan has made progress in rebuilding its foreign exchange reserves, outperforming targets set by the IMF.
Fitch also said that Pakistan’s economic activity is now benefiting from stability and falling interest rates, expecting “real value added to expand by 3.0% in FY25”.
Pakistan’s finance minister, Muhammad Aurangzeb, expressed hopes for an upgrade in the country’s credit rating, currently at CCC+ by Fitch and Caa2 by Moody’s, both considered “junk” territory.
“Ideally, I would like to think that some action in this direction can take place before our fiscal year is over, which is this June,” Aurangzeb told Reuters last month.
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