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Fitch, Moody foresee challenges for Pakistan despite IMF deal

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1 year ago

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  • Fitch says there is risk of IMF deal proving to be insufficient. 
  • It says Pakistan to require additional financing besides IMF outlays.
  • Moody’s says govt to 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 provide some relief for its strained public finances, but the country faces significant hurdles to sustain economic stability and growth, Moody’s Investors Service and Fitch said on Monday.

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

“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.”

The IMF deal, which is subject to approval by the fund’s executive board, will support Pakistan’s efforts to implement reforms that will bolster its macroeconomic resilience over the longer term, Moody’s said in an analyst report.

“The approval of the SBA would moderately alleviate Pakistan’s government liquidity risk in the next few months, as a disbursement of IMF financing would likely also catalyse financing from other bilateral and multilateral partners,” Moody’s analyst Grace Lim said.

However, the rating agency cautioned that the government’s ability to maintain reform momentum, especially revenue-raising measures, and secure external financing will be tested by political and social pressures ahead of elections due by October 2023. 

“Pakistan’s government liquidity risks remain very high,” Lim said. “It is uncertain that the Pakistani government will be able to secure full $3 billion of IMF financing during the nine-month SBA program.”

Pakistan’s economy has been battered by the coronavirus pandemic, floods, high inflation and social unrest. 

The country’s foreign exchange reserves are very low at $3.5 billion as of June 16, while its external debt repayments will remain high for the next few years, with about $25 billion due in fiscal 2024.

“While the IMF SBA alleviates some of the near-term pressures on Pakistan, there is still high uncertainty around Pakistan’s external funding prospects for the rest of fiscal 2024 and later. Pakistan’s government liquidity risks remain very high,” the analyst said.

In the near-term the economic activity in Pakistan would likely remain subdued.

“Ongoing economic hardships because of the repercussions from the floods, compounded by worsening social tensions, would continue to drag economic activity. Elevated external liquidity pressures, limited fiscal space, lagged effects of the central bank policy rate increases and high inflation would also constrain household and government spending, as well as business investment,” the analyst added. 

The IMF deal will help unlock financing from other bilateral and multilateral partners, easing some of the near-term pressures on Pakistan, Moody’s said.

Though, the country will need a longer-term external financing plan to meet its large financing needs for the next few years, which may require another IMF program after the elections. 

“This may come in the form of another IMF programme. However, whether Pakistan will join another IMF programme may only become clear after elections.” 

Negotiations for any future IMF program would also take some time, even if they succeed,” Lim said. 

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

Last month, Moody’s had warned that Pakistan could default without an IMF bailout as its financing options beyond June were uncertain.

Thus, reaching the SBA turned out to be a huge achievement for the government, with the stock market making historic day-on-day gains and the currency market stabilising after months.

According to the IMF, the staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July.

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It is anticipated that 150 ships would arrive at Gwadar by the year 2045, allowing the port to handle fifty percent of all imports.

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In an effort to strengthen the port’s economic importance, the Federal Government has made the decision to direct fifty percent of all imports from the public sector to Gwadar Port.

By taking this action, which has the backing of the Special Investment Facilitation Council, the port’s financial situation is going to be improved.

The Cabinet will be presented with a summary of imports through Gwadar by the Ministry of Maritime Affairs, which will take place after Prime Minister Shehbaz Sharif’s recent trip to China.

When the next Cabinet Meeting takes place, Ahsan Iqbal, the Federal Minister for Planning, Development, and Special Initiatives, will examine the Chinese offer for the Karachi to Hyderabad Section of the ML-1 Project and bring it to the Cabinet.

Company preparations for the Shanghai International Import Expo, which will take place in November 2024, are being made by the Board of Investment and the Ministry of Commerce of Pakistan.

One of the most important aspects of the China-Pakistan Economic Corridor is the Gwadar port, which serves as a significant commerce route connecting China, the Middle East, Africa, and Europe. At this time, the Gwadar Port is able to accommodate two huge ships, and by the year 2045, it is anticipated that it would be able to handle up to 150 ships.

By developing the Gwadar Port, regional connectivity would be improved, employment will be created, and international investment will be attracted.

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The price of gold in Pakistan has experienced a significant surge.

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Gold prices in Pakistan surged significantly on Thursday following two consecutive days of decline, with the price per tola rising by Rs2,000 to reach Rs262,100. This increase was in accordance with the downward trend in international market values.

The All-Pakistan Gems and Jewellers Sarafa Association (APGJSA) reported that the price of 10 grams of 24-karat gold rose by Rs1,714, reaching Rs224,708.

Conversely, the world gold market experienced an upward trajectory. According to the APGJSA, the global price of gold surged to $2,503 per ounce following a $22 gain during the trading session.

The local market experienced a significant decline in silver prices, decreasing from Rs50 to Rs2,900 per tola after a prolonged period.

The local market’s gold prices remain subject to the ever-changing dynamics of the international market, as well as domestic considerations such as currency exchange rates and domestic demand.

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The government has not met the deadline set by the International Monetary Fund (IMF) for the approval of a $7 billion loan.

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4 days ago

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On Tuesday night, there were virtual talks between representatives of the Finance Ministry and the IMF delegation, with the main topics being external finance and income generation.

According to people familiar with the situation, no date has been set for the IMF’s Executive Board to approve the loan despite the ongoing negotiations.

Officials from the Finance Ministry informed the IMF mission about the government’s initiatives to get outside funding during the discussions. Updates on loan rollovers and fresh finance commitments from allies were included in this. According to sources, the IMF has received a schedule, and loan rollovers are expected to be finished by the end of next week.

The $12 billion in debt must be rolled over before the loan can be approved by the Executive Board, according to the IMF mission.

In the virtual discussions, representatives of the Federal Board of Revenue (FBR) conversed with the IMF team over the revenue deficit. The FBR must reach its revenue goals for this month, according to the IMF mission. As a result, the IMF has asked the FBR to submit a thorough strategy outlining how it will close the gap left by the shortfall and guarantee that revenue goals are reached.

Apart from the conversations on outside funding, there are rumors that the Finance Ministry is actively holding talks with commercial banks in order to obtain new funding. According to reports, negotiations are taking place with four distinct sources for commercial loans, which are anticipated to support the government’s overall financial plan.

Finance Minister Muhammad Aurangzeb disclosed on Tuesday that the IMF was in favor of introducing targeted subsidies. He said that qualifying recipients might receive these subsidies through the Benazir Income Support Programme (BISP).

In order to guarantee consistency, the minister announced that this week’s talks with chief ministers will focus on implementing a similar policy across the country. He was having a casual conversation in parliament with the journalists.

In response to queries about outside funding, Aurangzeb revealed a $2 billion deficit and said that talks to close this gap are progressing. He stressed how crucial it is to obtain business loans.

He went on, “At this point, there’s a need to secure an agreement for commercial loans, not exactly their issuance,” emphasizing that debt rollover negotiations are nearing their conclusion and doing well. The minister expected that these developments would shortly be reported to the governments of allied countries by relevant authorities.

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