Following the downgrade in Feb’23, Fitch has today upgraded ratings of Pakistan, while affirming Country Ceiling at B-. To highlight, Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been upgraded to ‘CCC’ from ‘CCC-‘. It is almost after a gap of five months (Feb’23) that Fitch has upgraded this rating of Pakistan.

· Risks associated with external financing reducing: Pakistan’s credit upgrade is attributed to improved external liquidity and funding conditions after reaching a Staff-Level Agreement with the IMF, which is expected to be approved in Jul’23, boosting funding and policy stability ahead of elections in Oct’23. However, risks persist due to a volatile political environment and significant external financing needs.

· IMF-driven reforms to address key challenges: Pakistan has implemented IMF-driven reforms to address challenges related to government revenue collection, energy subsidies, and exchange rate policies. These reforms, including measures such as import financing restrictions, were crucial to completing the last three reviews of Pakistan’s previous IMF program. Additionally, the government made amendments to the proposed budget for FY24 by introducing new revenue measures, reducing spending, and abandoning exchange-rate management, with import prioritization guidelines being removed in Jun’23.

· Implementation challenges: Despite the govt’s completion of necessary policy actions under the SBA, Pakistan’s historical track record raises concerns about potential delays, obstacles, and policy missteps, particularly leading up to the Oct’23 elections and uncertainties regarding post-election commitment to the program.

· Unlocking new funding: IMF Board approval will unlock USD 1.2bn disbursement, with an additional USD 1.8bn scheduled for later reviews. Saudi Arabia and the United Arab Emirates have pledged USD 3bn, while USD 3-5bn in other multilateral funding is anticipated. The SBA is expected to facilitate the disbursement of a portion of the USD 10bn aid commitments from the Jan’23 flood relief conference (Geneva), primarily through project loans (USD 2bn allocated in the budget).

· Ambitious funding targets: The gov’t aims for USD 25bn in new external financing in FY24, against USD 15bn in debt maturities, including bonds and multilateral creditors. Market issuance and commercial bank borrowing may pose challenges, but previously unrolled loans could return, and maturing deposits from China, Saudi Arabia, and the UAE are expected to be rolled over.

· Narrowed CAD and risks: Pakistan’s CAD has significantly reduced due to import restrictions, fiscal policies, and energy consumption measures. However, risks persist as import backlogs, manufacturing sector dependencies, and post-flood reconstruction needs could widen the deficit. Currency depreciation and bank financing aim to limit the rise, while remittance inflows may recover through unofficial channels benefiting from favorable exchange rates. Fitch expects CAD to be around 1% of GDP in FY24.

Courtesy – AHL Research