Pakistan's external financing needs set to remain high, caution flags for 2024: Fitch

December 18, 2023 (MLN): The recent affirmation of Pakistan’s ‘CCC’ rating reflected some near-term certainty over external liquidity and funding provided by its nine-month Stand-by-Arrangement (SBA) with the International Monetary Fund (IMF), Fitch Ratings says.

Nevertheless, Pakistan’s external funding requirements are set to remain high and its reserves low, leaving it dependent on the IMF and bilateral and multilateral support, which could be jeopardized by policy mistakes and political volatility, as in the past.

The State Bank of Pakistan's (SBP) reserves have improved, but remain low, and projected external funding needs will continue to exceed reserves for at least the next few years, while broader measures of net reserves are deeply negative.

Pakistan’s exchange rate appears more stable and more market-driven after depreciating in the past two years.

The SBP has refrained from overt intervention to support the rupee, and the gap between the interbank and kerb market rates has narrowed.

Nevertheless, ad hoc capital controls by banks indicate that some supply-demand imbalances persist at current exchange rates and point to a preference for exchange-rate stability among commercial banks and the SBP.

While these informal controls will help contain the current account deficit (CAD), they increase forecast uncertainty.

Most of Pakistan’s IMF programmes have ended prematurely, with exchange rate management, revenue mobilization, and energy sector and state-owned enterprise reform posing recurring challenges.

Extensive support from Gulf Cooperation Council countries and China has been critical to stabilizing Pakistan’s finances in times of stress.

New bilateral funding has become more conditional in recent years, reflecting large existing exposures, shifting geopolitics and policy challenges.

This limits Pakistan’s financing options but may support its reform commitment.

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