Fitch and Moody’s: IMF loan provides temporary relief for Pakistan, but risks remain

Fitch Ratings and Moody’s Investors Service issued warnings on Monday regarding Pakistan’s financial sustainability, despite the recent acquisition of a much-needed $3 billion lifeline from the International Monetary Fund (IMF).

Last week, Pakistan signed a short-term (nine-month) loan programme worth $3 billion with the IMF, as the previous $7 billion programme was prematurely ending on the same day.

The objective of the new loan programme is to provide the necessary foreign exchange to reopen imports, support listed companies in gradually resuming partially closed production, and stimulate economic activities within the country.

Additionally, this programme serves as a signal to other donor agencies and friendly nations, which had pledged $9 billion at a Geneva meeting in January 2023, to extend new financing to Islamabad.

However, the two global rating agencies caution that risks persist for Pakistan’s economy, particularly as the government faces a daunting $25 billion debt repayment challenge in the upcoming year starting in July.

Krisjanis Krustins, Fitch’s Director of Sovereigns for APAC, emphasised that Pakistan will require significant additional financing beyond IMF disbursements to meet its debt obligations and support an economic recovery.

While the IMF likely sought and received assurances for such financing, there remains a risk that it could prove insufficient, especially if current account deficits widen again.

In order to secure the initial agreement with the IMF, Pakistan had to implement measures such as tax increases, spending cuts, and raising its primary interest rate to a historical peak.

Although the markets responded positively to this initial agreement, leading to a significant surge in stocks and improved performance of dollar bonds, it still awaits approval from the IMF Executive Board.

Moody’s analyst Grace Lim, based in Singapore, expressed doubts about Pakistan’s ability to secure the full $3 billion IMF financing during the stand-by period of the loan programme. Lim stated that it remains uncertain whether the Pakistani government will be able to secure the complete amount.

Furthermore, she highlighted that the government’s commitment to implementing ongoing reforms will be tested as the country approaches elections scheduled for October 2023.

It is worth noting that Pakistan had previously obtained a $1.1 billion loan in August, which was subsequently halted due to Islamabad’s failure to comply with certain stipulated conditions.

According to Moody’s, the towering $25 billion debt repayment comprises both principal and interest, amounting to nearly seven times Pakistan’s foreign exchange reserves.

Lim further added that only after the elections will it become clear whether the country will be able to enter into another IMF programme.

Until a new programme is agreed upon, Pakistan’s ability to secure loans from other bilateral and multilateral partners in the long term will be severely limited, she cautioned.