Fitch warns loans from China can ‘complicate’ Pakistan’s negotiations with IMF

Fitch, the global credit agency, has stated that the newly elected government of Pakistan Tehrik-e-Insaf (PTI) will face considerable pressure from the external and fiscal problems marring the country’s economy.

“Pakistan's incoming PTI-led coalition government, which took office this week, will be under immediate pressure to arrest the deterioration in external finances and address fiscal challenges, as well as to attract the external funding necessary to meet its financing gap,” stated Fitch in a statement.

The US-based credit rating agency was of the view that PTI's economy agenda, which focuses on confronting corruption, reducing inequality and expanding social services, would ‘be limited in the short term.’

Meanwhile, in order to prevent the widening of the large external financing gap, Fitch expects the new Government of Pakistan to seek potential financing from several sources including China and multilateral development banks, and possibly the International Monetary Fund (IMF).

“[However,] negotiations over an IMF agreement could be complicated by loans linked to the China-Pakistan Economic Corridor (CPEC), part of China's Belt Road Initiative (BRI), particularly amid rising global geopolitical tensions,” stated Fitch.

Other recent statements from US Secretary of State Mike Pompeo suggest that the US administration does not want IMF financing used to bail out Chinese lenders. However, one does need US backing to seek an IMF loan but 'US pressure could lead to stricter programme conditionality, including the curtailment of CPEC projects and greater transparency in CPEC financing, the agency added.

Fitch stated that sharp rise in global risk aversion towards emerging markets, and a projected rise in Pakistan's external debt obligations in 2019 have increased the financing pressures. “The fiscal deficit has also widened and is likely to well exceed our previous estimate of 6% of GDP in FY18, up from 5.8% a year earlier,” stated Fitch.