WASHINGTON: The closely contested election outcome in Pakistan raises concerns about the nation’s pursuit of a crucial financing agreement with the International Monetary Fund (IMF), warns the global credit agency Fitch Ratings.

The current Stand-By Arrangement (SBA) is set to expire in March, and Pakistan has already launched its efforts for a new $6 billion deal.

“A new deal is pivotal to the country’s credit profile, and we anticipate its realisation within a few months. However, prolonged negotiations or a failure to secure it would heighten external liquidity stress and elevate the risk of default,” cautions Fitch Ratings in its latest report on Pakistan.

Recent reports from Human Rights Watch (HRW) and Amnesty International shed light on Pakistan’s severe economic crisis since 2022, impacting millions of people’s rights to health, food, and an adequate standard of living. Climate change intensifies vulnerabilities, with Pakistan facing above-average warming rates and devastating floods.

Some international experts have speculated about a possible military takeover in Pakistan to restore stability and attract investments.

But Michael Kugelman, a South Asia scholar at the Wilson Centre in Washington, dismisses the notion that a military regime would attract more Foreign Direct Investment (FDI), citing the importance of a stable investment climate.

“Frankly, if there is a great illusion, it is the idea that a military regime would spark more FDI. So long as the investment climate remains poor, FDI will be limited,” he said in a tweet on Tuesday. “Also, a military regime would likely be very unpopular, raising destabilisation risks and further discouraging FDI.”

Fitch Ratings notes a recent improvement in Pakistan’s external position but underscores the continuing funding shortfall. Net foreign reserves increased to $8bn by Feb 9, up from $2.9bn in February 2023, yet remain low relative to projected needs.

The report estimates that less than half of the $18bn funding plan for the fiscal year ending June 2024 has been met.

Fitch emphasises the urgency for the new government, expected to be a coalition of the PMLN and Pakistan Peoples Party, to secure financing from multilateral and bilateral partners.

Negotiating a successor deal to the SBA is crucial for Pakistan’s credit profile and economic trajectory, but Fitch anticipates tougher conditions for any successor arrangement.

Political stability is key, as continued instability could hinder discussions with the IMF, assistance from other partners, or reform implementation.

While the election indicated strong public support for Imran Khan’s Pakistan Tehreek-i-Insaf party, the likely coalition government may face resistance to tougher IMF deal conditions. Fitch assumes such resistance will be overcome given the acute economic challenges and limited alternatives.

Despite a history of incomplete IMF programmes in Pakistan, there is optimism regarding the current SBA. Fitch believes a stronger consensus on the need for reform could facilitate the implementation of a successor arrangement.

Published in Dawn, February 20th, 2024

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