Fitch and Moody’s sound alarm despite IMF deal

In a recent development, Fitch Ratings and Moody’s Investors Service have raised concerns about ongoing economic risks for Pakistan, despite the country securing a crucial $3 billion lifeline from the International Monetary Fund (IMF) over the weekend.

Pakistan entered into a short-duration (nine-month) $3 billion loan program with the IMF last week, following the revival of the $7 billion program that was originally set to end prematurely on the same day.

The primary objective of the program is to provide the necessary foreign exchange to resume imports, support listed companies in gradually reopening partially closed production, and reinvigorate economic activities in the country.

This new IMF program has also served as a signal to other donor agencies and friendly countries, prompting pledges of $9 billion at a Geneva meeting in January 2023.

However, both Fitch and Moody’s cautioned that risks persist for the South Asian economy, particularly as the government faces a challenging $25 billion debt repayment hurdle in the upcoming fiscal year starting in July.

Krisjanis Krustins, Director of Sovereigns for APAC at Fitch, emphasized that Pakistan will require significant additional financing beyond the IMF disbursements to meet its debt obligations and fuel economic recovery. There is a concern that the current financing might prove insufficient, especially if current account deficits widen again.

To secure the initial agreement with the IMF, Pakistan implemented measures such as tax increases, spending cuts, and raising its primary interest rate to a historic peak. While the agreement was initially well-received by the markets, leading to a surge in stocks and a strong performance of dollar bonds, it still awaits approval from the IMF Executive Board.

Moody’s analyst Grace Lim, based in Singapore, expressed uncertainty regarding Pakistan’s ability to secure the complete $3 billion IMF financing during the stand-by period. She highlighted that the government’s commitment to ongoing reforms will face a test as elections are scheduled for October 2023.

Pakistan had previously obtained a $1.1 billion loan in August, which was subsequently halted due to non-compliance with certain conditions stipulated by Islamabad.

The towering $25 billion debt repayment, encompassing both principal and interest, is nearly seven times Pakistan’s foreign exchange reserves, according to Moody’s.

Lim emphasized that only after the elections will it become clear whether Pakistan will be able to enter into another IMF program. She warned that until a new program is agreed upon, Pakistan’s ability to secure loans from other bilateral and multilateral partners on an ongoing basis will be severely constrained.