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ISLAMABAD: Fitch rating agency maintained Pakistan’s long-term foreign-currency issuer default rating (IDR) at ‘CCC’. On 10 July 2023, twelve days after Pakistan reached a staff level agreement on the Stand By Arrangement with the International Monetary Fund (IMF) on 29 June Fitch upgraded Pakistan’s rating to “CCC” from “CCC-”.

Fitch typically does not assign outlooks to sovereigns with a rating of ‘CCC+’ or below.

The rating agency stated that ‘CCC’ rating reflects high external funding risks amid high medium-term financing requirements, despite some stabilisation and Pakistan’s strong performance on its current Stand-by Arrangement (SBA) with IMF.

“We expect general elections to take place as scheduled in February, and to produce a coalition government along the lines of Shehbaz Sharif’s government. Former prime minister Imran Khan’s Pakistan Tehreek-e-Insaf party likely remains popular, but its electoral prospects may be limited by Khan’s imprisonment and the departure of senior leaders.

Space for political expression has shrunk since widespread protests in May 2023. Nevertheless, further delays to elections or renewed political volatility cannot be excluded and would jeopardise negotiations with IMF and external funding,” the rating agency added.

“We expect elections to take place as scheduled in February and a follow-up IMF programme to be negotiated quickly after the SBA finishes in March 2024, but there is still the risk of delays and uncertainty around Pakistan’s ability to do this.

The elections could endanger the durability of recent reforms and leave room for renewed political volatility,” the rating agency added.

It further stated that in November, Pakistan and the IMF reached staff-level agreement (SLA) on the first review of the country’s nine-month SBA, which was approved by the IMF Executive Board in July 2023. We expect board approval of the recent SLA to be unproblematic. The successful programme review reflects continued fiscal consolidation, energy price reforms in the face of a public backlash, and moves towards a more market-determined exchange rate regime.

Many of Pakistan’s policy commitments under the SBA had been frontloaded, but Pakistan’s caretaker government, which took office in August, has also taken new measures, including sharp hikes to natural gas and electricity prices and a crackdown on the black market, helping narrow the gap between the parallel (kerb) and interbank exchange rates and bringing more FX into the banking system.

In June, the previous government amended its proposed FY24 budget to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February.

Fitch stated that parties across the political spectrum in Pakistan have an extensive record of failing to implement or reversing reforms agreed with the IMF.

Copyright Business Recorder, 2023

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