ISLAMABAD  -  Fitch Ratings has up­graded Pakistan's Long-Term Foreign-Currency Issuer Default Rat­ing (IDR) to 'CCC' from 'CCC-'. F reflecting Paki­stan's improved exter­nal liquidity and fund­ing conditions following its Staff-Level Agree­ment (SLA) with the IMF on a nine-month Stand-by Arrangement (SBA) in June.

“We expect the SLA to be approved by the IMF board in July, catalyzing other funding and an­choring policies around parliamentary elections due by October,” said Fitch Ratings in a state­ment. Nevertheless, it noted that programme implementation and ex­ternal funding risks re­main due to a volatile political climate and large external financing requirement.

Pakistan has recently taken measures to address shortfalls in government revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate, including import financing restrictions. These issues held up the last three reviews of Pakistan’s previous IMF programme, before its expiry in June.

Most recently, the government amended its proposed budget for the fiscal year ending June 2024 (FY24) to intro­duce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February. The authorities appeared to abandon exchange-rate man­agement in January 2023, although guidelines on prioritiz­ing imports were only removed in June.

Pakistan has an extensive record of going off-track on its commitments to the IMF. “We understand the government has already made all the required policy actions under the SBA. Nevertheless, there is still scope for delays and chal­lenges to implementation as well as new policy missteps ahead of the October elections and uncertainty over the post-election commitment to the programme”.

The IMF board approval of the SBA will unlock an im­mediate disbursement of USD1.2 billion, with the re­maining USD1.8 billion scheduled after reviews in No­vember and February 2024. Saudi Arabia and the United Arab Emirates have committed another USD3 billion in deposits, and the authorities expect USD3-5 billion in other new multilateral funding after the IMF agreement. The SBA should also facilitate disbursement of some of the USD10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of proj­ect loans (USD2 billion in the budget).

According to the Fitch, the authorities expect USD25 bil­lion in gross new external financing in FY24, against USD15 billion in public debt maturities, including USD1 billion in bonds and USD3.6 billion to multilateral creditors. The gov­ernment funding target includes USD1.5 billion in market issuance and USD4.5 billion in commercial bank borrow­ing, both of which could prove challenging, although some of the loans not rolled over in FY23 could now return. USD9 billion in maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over, as in FY23.

Pakistan’s current account deficit (CAD) has narrowed sharply, driven by earlier restrictions on imports and FX availability, tighter fiscal and economic policies, mea­sures to limit energy consumption and lower commod­ity prices. Pakistan posted current account surpluses in March-May 2023, and we forecast a CAD of about USD4 billion (1% of GDP) in FY24, after USD3 billion in FY23 and over USD17 billion in FY22. Our forecast CAD is low­er than the USD6 billion in the budget, on the assump­tion that not all of the planned new funding will materi­alize, constraining imports.

The CAD could widen more than we expect, given con­tinued reports of import backlogs, the dependence of the manufacturing sector on foreign inputs, and reconstruc­tion needs after last year’s floods. Nevertheless, the cur­rency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after partly switching to unofficial channels to ben­efit from more favourable parallel market exchange rates.

Liquid net FX reserves of the State Bank of Pakistan have hovered around USD4 billion since February 2023, or less than a month of imports, down from a peak of more than USD20 billion at end-August 2021. The col­lapse in reserves reflected large CADs, external debt ser­vicing and earlier FX intervention by the central bank. We expect a modest recovery for the rest of FY24 on new external financing flows, although these flows will also lead to a renewed widening of the CAD.

Protests by supporters of former Prime Minister Im­ran Khan and his PTI party sharply intensified in May as Mr Khan was briefly arrested on corruption charges, cul­minating in attacks on army facilities. In the ensuing crack­down, a large number of PTI members were arrested, with several high-ranking PTI politicians quitting politics. Nev­ertheless, the enduring popularity of Mr Khan and PTI cre­ate policy uncertainty around elections.

The Fitch expects the consolidated general government (GG) fiscal deficit to widen to 7.6% of GDP in FY24, from an estimated 7.0% in FY23, driven by higher interest costs on domestic debt, which accounts for the difference between our forecast and a GG deficit of 7.1% of GDP in the revised FY24 budget statement (with a lower figure of 6.5% in the medium-term fiscal framework). Fiscal consolidation will drive a slight improvement in our forecast GG primary defi­cit to 0.1% of GDP in FY24, from 0.5% of GDP in FY23.

The GG debt/GDP of 74% at FYE23 is in line with the median for ‘B’, ‘C’ and ‘D’ rating category sovereigns and debt dynamics are broadly stable owing to high nominal growth over the medium term. Nevertheless, debt/reve­nue (over 600%) and interest/revenue (nearly 60%) are far worse than that of peers.

The finance minister has recently said that Pakistan would seek maturity extensions on loans by non-Paris club bilateral creditors, while reaffirming the government’s commitment to timely debt service. We understand that such maturity extensions would mostly relate to loans and deposits by China, Saudi Arabia and the UAE, which are al­ready regularly rolled over.

In 2022, the prime minister and former finance minister raised the possibility of seeking debt relief from non-com­mercial creditors, including the Paris Club, but the authori­ties now appear to have moved away from this. Should Par­is Club debt treatment be sought, Paris Club creditors are likely to require comparable treatment for private external creditors in any restructuring.