Fitch warns of funding challenges for Pakistan if IMF conditions not met

International agency Fitch Ratings has hinted that Pakistan might face difficulties in arranging funds from bilateral sources if it fails to meet the conditions of the International Monetary Fund.

Fitch Ratings has released a report saying that foreign-exchange reserves are rising across the vast majority of rated Asia-Pacific (APAC) sovereigns in Fitch Ratings’ portfolio and, if sustained, will strengthen external buffers and support the credit profiles of many sovereigns across the region.

Pakistan’s gross foreign-exchange reserves reached $17.4 billion at end-September, up from $7.9 billion in January 2023, almost more than doubled in 19 months.

However, rising reserves could also contribute to international tensions over exchange-rate policies in some cases. In other cases, US dollar strength could lead to rising foreign-exchange interventions and a fall in reserves, the report said.

Improved external buffers would have an especially positive effect on credit profiles of APAC’s frontier markets. These markets are vulnerable to a strong US dollar from rising protectionism.

When Fitch upgraded Pakistan’s rating to ‘CCC+’ in July, it stated that improved foreign-exchange levels and further fiscal consolidation were likely in light of the greater external funding certainty from its recently agreed $7 billion Extended Fund Facility with the IMF.

However, Pakistan's large funding needs would leave it vulnerable if its access to external finances were constrained, for example due to a failure to implement the challenging reforms under its IMF program.

Pakistan's economy is gradually stabilizing with the new IMF program as external accounts are showing substantial improvement, inflation is coming down sharply and fiscal accounts are consolidating. However, growth is expected to remain modest on the back of lower agriculture growth.

Pakistan's external repayments (net of rollover and refinances) are expected at $10 billion for fiscal year 2024-25 (FY25), as per the governor State Bank’s comment in an analyst briefing.

With current account deficit expectations of $1.3 billion for FY25, the gross financing requirement (net of rollover and refinances) is expected at $11.3 billion, a manageable amount in Fitch's view. As per IMF document, Pakistan's gross external financing requirement is at a nine-year low of $18.8 billion.