International credit ratings agencies Fitch and Moody’s Investors Service on Monday warned that Pakistan’s economy remains at risk due to its funding requirements despite the relief offered by the $3 billion stand-by arrangement (SBA) inked between Islamabad and the International Monetary Fund (IMF).
Both agencies have noted that Pakistan needs to repay $25 billion in the current fiscal year to meet its debt obligations, significantly more than the IMF loan Pakistan secured last week that is still subject to approval by the IMF Executive Board, which would meet later this month.
“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 Asia-Pacific 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,” he added.
Similarly, Moody’s said that the IMF deal would support Pakistan’s measures to implement long-term reforms but cautioned that social and political pressures could prove stumbling blocks. “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 catalyze financing from other bilateral and multilateral partners,” wrote Moody’s analyst Grace Lim, warning the government’s ability to implement reforms would be tested by political and social pressures ahead of general elections due later this year.
“Pakistan’s government liquidity risks remain very high,” she said, noting it was “uncertain” whether authorities would be able to secure the full $3 billion of financing within nine months. “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,” she stressed, adding that in the short-term economic activity would remain subdued in the country.
“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,” wrote the analyst in a statement to Bloomberg.
Moody’s noted that the IMF deal would help unlock financing from other bilateral and multilateral partners, easing some near-term pressures. However, the analyst added, the country would need a longer-term external financing plan to meet its financing needs for the next few years, potentially requiring another IMF program after elections. “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,” she added.