IMF deal with Pakistan, Following the recent general elections, which were marred by accusations of election rigging, Fitch Ratings has highlighted Pakistan’s default threats if it fails to secure the next bailout package from the International Monetary Fund (IMF) as a result of prevailing political uncertainty. If the next bailout package from the IMF cannot be secured, Pakistan’s economy could suffer a severe recession.
The rating agency said on Monday that a new IMF deal is crucial to the country’s credit profile, and it assumed that one would be achieved within a few months, which meant the rating agency assumed that an agreement would be reached within a few months. According to its assessment, if negotiations are prolonged or if the agreement cannot be reached, external liquidity stress will increase, increasing default chances.
As a result of its improved external position in recent months, Pakistan has been able to report net foreign reserves of $8 billion as of February 9, 2024, an improvement from the low of $2.9 billion a year ago. This is due to the effort of the State Bank of Pakistan (SBP).
We expect the withdrawal of reserves over the next few years will not be sufficient to meet projected external funding needs, but nevertheless, this is low when compared to projected external funding needs.
As a result, the rating agency estimates Pakistan met less than half of its $18 billion funding plan during the first two quarters of the fiscal year ending June 2024 (FY24), excluding the routine rollover of bilateral debt that takes place every year, the agency noted.
The rating agency Fitch Ratings said that due to the sovereign’s vulnerable external position, it will be necessary for the new government to secure funding from multilateral and bilateral partners in order to avoid a financial crisis.
‘PML-N, PPP look set to form coalition government’
In spite of strong performances from Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) candidates in the election, it appears that there will be a coalition between the Pakistan Muslim League-Nawaz party and the Pakistan Peoples Party.
The negotiation of a successor agreement to the SBA and adhering to the policy commitments set forth therein will be crucial to the country’s ability to attract most other sources of external financing, not just the IMF, and will also have a strong influence on the country’s economic trajectory going forward.
There is going to be a lot of work involved in finalizing a new IMF deal. The present SBA is an interim package, and it is our belief that any successor arrangement will come with tougher conditions, which is something that may be resisted by entrenched vested interests in Pakistan, which we believe it is likely to face opposition. While we, at a global rating agency, assume there will be a lot of resistance, given the particulars of the country’s economic challenges and the narrow range of options available, we also assume any resistance will be overcome.
In the absence of political stability within the country, discussions with the IMF could be pushed back, other multilateral and bilateral partners could delay their assistance, or the implementation of reforms could be hindered. As a result of these developments, we believe that a government will take office and engage with the IMF relatively quickly, although there are likely to be high risks to political stability. It has been suggested that public discontent is likely to rise further if PTI continues to be sidelined – the election showed that the party continues to have strong public support, it added.
This is not a good record.
Additionally, the rating agency emphasized the poor record of successive governments in the completion of the IMF programs – only half of the 24 IMF programmes were completed, and only 75% of the available funds were disbursed.
Nevertheless, it can be said that under the current SBA, there have been some progress on targets. There is also our perception that there is a greater consensus within Pakistan regarding the need for reform, which could make a successor arrangement much easier to implement in the future.
If external liquidity pressures ease over the next few years, either as a result of initial reform successes or the easing of external pressures caused by developments outside Pakistan like a significant drop in oil prices, there is a possibility that policy risks may rise again in the future.
There is a high risk of a resurgence in economic and external imbalances as a result. Fitch believes that Pakistan will remain structurally weak as long as it does not develop a private sector that can generate significant more export income, attract large amounts of foreign direct investment or reduce its dependence on imports, the rating agency said.
Timenews provided that news.
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