Fitch, a global rating agency, has upgraded Pakistan’s credit rating by one notch, signaling improved external liquidity and funding conditions.
However, Fitch warned about potential risks related to the implementation of the new IMF program, arranging foreign loans, and meeting the new budget deficit target.
The upgrade to Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from CCC- to CCC reflects the country’s improved external liquidity and funding conditions following the staff-level agreement with the IMF on a nine-month Stand-by Arrangement (SBA) in June.
While the upgrade is a positive development, Pakistan remains in the “very high credit risk” category.
Fitch highlighted that program implementation and external funding risks remain due to a volatile political climate and a large external financing requirement.
The approval of the IMF board for the SBA is expected in July, unlocking an immediate disbursement of $1.2 billion, with the remaining $1.8 billion scheduled after reviews in November and February 2024.
The Pakistani government has taken measures to address revenue shortfalls, energy subsidies, and policies inconsistent with a market-determined exchange rate.
However, Fitch cautioned that Pakistan has a history of going off-track on commitments to the IMF, and there is still a possibility of delays, challenges, and policy missteps, especially with the upcoming elections.
Fitch also raised queries about Pakistan’s ability to arrange new foreign commercial loans and issue sovereign bonds during a meeting with the finance ministry. The government aims to secure $25 billion in gross new external financing in FY24, including market issuance and commercial bank borrowing, which could prove challenging.
The current account deficit is projected to be $4 billion, lower than the official target of $6 billion. Fitch mentioned that foreign exchange reserves remain low, and while there may be a modest recovery with new external financing flows, it could lead to a renewed widening of the current account deficit.