Pakistan's IMF program and external funding in peril, warns Fitch Ratings

September 08, 2023 (MLN): Pakistan is confronting risks with the implementation of the International Monetary Fund (IMF) program and external funding amid large external financing requirements and a volatile political climate, Fitch Ratings on Thursday said. 

Fitch upgraded Pakistan’s rating to ‘CCC’, from ‘CCC-’ in July, on the assumption that the IMF deal would catalyse other funding and anchor policies around the parliamentary elections. 

Pakistan’s reserves rose by around $3.8 billion in July after the country agreed to a nine-month Stand-by Arrangement with the IMF. 

A rebuilding of reserves and easing of external financing risks could increase upward pressure on Pakistan’s rating.

"However, the political climate remains volatile and we view risks to IMF programme implementation and external funding as high amid Pakistan’s large external financing requirement," the statement reads. 

Fitch in the same statement discussed the reserve dynamics among APAC sovereigns which appear to be diverging, with potential implications for their credit profiles.

Some central banks have been able to accumulate reserves on current account improvements or investment inflows, while others still see their currencies under pressure from US Fed tightening prospects.

Official reserves among Fitch-rated sovereigns in APAC increased by almost $170 billion in 1H23, mostly driven by growth among those with already large reserve buffers, including China (A+/Stable), Singapore (AAA/Stable), India (BBB-/Stable), Japan (A/Stable) and Taiwan (AA/Stable).

Strong external liquidity positions support these sovereigns’ credit profiles, but further reserve increases are unlikely to have much near-term influence on ratings.

Reserve dynamics may have a greater impact for frontier market sovereigns, especially where reserve coverage ratios are low and external liquidity positions fragile.

Fitch Rating in its most recent rating assessments stated that external finance factors, potentially including marked or sustained declines in foreign-exchange reserves, could be a driver of negative rating action in sovereigns such as Bangladesh (BB-/Stable), the Maldives (B-/Negative), Mongolia (B/Stable) and Vietnam (BB/Positive).

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