Fitch and Moody’s Warn of Persisting Economic Risks for Pakistan Despite the IMF Agreement

Even though Pakistan received a much-needed $3 billion reprieve from the International Monetary Fund (IMF) over the weekend, Fitch Ratings and Moody’s Investors Service warned on Monday of ongoing threats to Pakistan’s financial sustainability.

Pakistan signed a short-term (3-billion-dollar, nine-month) loan agreement with the IMF last week, following the revival of a $7-billion loan agreement that was ostensibly set to expire on the same day.

The program is anticipated to make the necessary foreign exchange accessible to reopen imports, assist listed companies in gradually resuming partially halted production, and revitalize the country’s economic activities.

The new program has also signaled to other donor agencies and sympathetic nations that they should extend new funding to Islamabad, as they pledged $9 billion at a January 2023 meeting in Geneva.

The South Asian government faces a $25 billion debt repayment hurdle in the fiscal year commencing in July, prompting the two global rating agencies to warn of ongoing risks to the economy.

Bloomberg quoted Krisjanis Krustins, director of sovereigns for APAC at Fitch, as saying, “Pakistan will require substantial additional financing beyond IMF disbursements to meet its debt maturities and finance an economic recovery.”

“While it is likely that the IMF sought and received assurances for such financing, there is a risk that they will prove insufficient, especially if current account deficits expand once more.”

Pakistan was required to increase taxes, reduce expenditure, and increase its primary interest rate to an all-time high in order to secure an initial agreement with the IMF.

Although the initial agreement was well-received by the markets, causing stocks to surge and dollar bonds to experience their best run, the IMF Executive Board has yet to approve it.

Grace Lim, a Singapore-based analyst at Moody’s, expressed skepticism regarding Pakistan’s ability to secure the full IMF financing during the stand-by period.

“It is uncertain that the Pakistani government will be able to secure the full $3 billion of IMF financing during the nine-month stand-by arrangement program,” Lim told Bloomberg.

She stated that the government’s commitment to continuously implement reforms will be put to the test when it goes to the polls in October 2023.
Pakistan had previously obtained a $1.1 billion loan in August, but it was subsequently canceled due to Islamabad’s failure to meet certain conditions.

According to Moody’s, the staggering $25 billion debt repayment consists of both principal and interest, which is nearly seven times Pakistan’s foreign exchange reserves.

Lim stated that it would not be obvious until after the elections whether or not the nation would be able to join another IMF program.

Pakistan’s ability to secure loans from other bilateral and multilateral partners over the extended term will be severely constrained until a new program is agreed upon, she warned.