ISLAMABAD: The global ratings agency Fitch on Wednesday maintained Pakistan’s long-term foreign currency issuer default rating at ‘CCC’ and noted that it expects general elections to take place as scheduled and produce a coalition government “along the lines of Shehbaz Sharif’s government”.

The unchanged credit rating is based on the last month’s IMF staff-level agreement on the first review of Pakistan’s nine-month standby arrangement (SBA).

But US-based Fitch Ratings — one of three leading global rating agencies — expressed concern over the uncertainties surrounding the upcoming elections and the potential for ensuing political volatility, which could impact the implementation of structural reforms and pose economic challenges.

Fitch had previously downgraded Pakistan’s rating from ‘CCC+’ in October 2022 to ‘CCC-’ in February 2023 before upgrading again to ‘CCC’ in July.

Says delay in elections may jeopardise IMF negotiations

On Wednesday, the rating agency saw high but easing external risks. It said the ‘CCC’ rating reflects high external funding risks amid high medium-term financing requirements, despite some stabilisation and Pakistan’s strong performance on its current SBA with the IMF staff.

“We expect elections to take place as scheduled in February and a follow-up IMF programme to be negotiated quickly after the SBA finishes in March 2024, but there is still the risk of delays and uncertainty around Pakistan’s ability to do this,” Fitch said in a statement, adding that the “elections could endanger the durability of recent reforms and leave room for renewed political volatility”.

It expected IMF’s board approval of the recent staff-level agreement to be “unproblematic” and noted that the successful programme review reflected continued fiscal consolidation, energy price reforms in the face of a public backlash and moves towards a more market-determined exchange rate regime.

Fitch also appreciated the caretakers, saying many of Pakistan’s policy commitments under the SBA had been front-loaded, but the caretaker government, which took office in August, had also taken new measures, including sharp hikes to natural gas and electricity prices and a crackdown on the black market, helping narrow the gap between the parallel (kerb) and interbank exchange rates and bringing more foreign exchange into the banking system.

In June, the previous government amended its proposed budget for the current fiscal year to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February.

Noting risks to policy implementation, the rating agency said parties across Pakistan’s political spectrum had an extensive record of failing to implement or reversing reforms agreed with the IMF.

“We see a risk that the current consensus within Pakistan on the measures necessary to ensure continued funding could dissipate quickly once economic and external conditions improve, although Pakistan now has fewer financing options than in the past,” it said.

Therefore, any follow-up IMF programme would likely require Pakistan to “undertake sweeping structural reforms in opposition to entrenched vested interests”.

Fitch expected general elections to take place as scheduled in February and to produce a coalition government “along the lines of Shehbaz Sharif’s government”.

It added that the Pakistan Tehreek-i-Insaf likely remains popular, but its electoral prospects may be limited by Imran Khan’s imprisonment and the departure of senior party leaders.

“Space for political expression has shrunk since widespread protests in May 2023,” it observed and warned that further delays to elections or renewed political volatility could not be excluded and would jeopardise IMF negotiations and external funding.

The Fitch said Pakistan’s overall external funding targets of $18bn (gross) for the current fiscal year were ambitious against nearly $9bn in government debt maturities. The maturing debt includes a $1bn bond due in April and $3.8bn to multilateral creditors but excludes routine rollovers of bilateral deposits.

“At end-September, maturities in the remaining three quarters of FY24 were just over $7bn,” it said, adding that the funding target included $1.5bn in Eurobond/sukuk issuance and $4.5bn in commercial bank borrowing, “which will likely prove challenging”.

Published in Dawn, December 14th, 2023