Political Instability in Pakistan Casts Doubt on IMF Agreement: Fitch's Concerns

Fitch, a prominent global ratings agency, issued a cautionary note on Monday regarding the recent elections in Pakistan, stating that the tight contest and subsequent political uncertainty could hinder the country's efforts to secure financial assistance from the International Monetary Fund (IMF).

The agency emphasized the importance of a new IMF agreement to replace the expiring Stand-By Arrangement (SBA) in March, highlighting it as crucial to Pakistan's credit profile. While the country received a second tranche of over USD 700 million last month under the existing SBA, Fitch stressed the necessity of reaching a new agreement to alleviate external liquidity stress and mitigate the risk of default.

Despite recent improvements in Pakistan's external position, with net foreign reserves reaching USD 8 billion, Fitch expressed concerns about the country's ability to meet its projected external funding needs, which are expected to surpass available reserves in the coming years.

The agency underscored the urgency for the incoming government, likely to be a coalition led by the Pakistan Muslim League-Nawaz (PLM-N) and Pakistan People's Party (PPP), to secure financing from multilateral and bilateral partners. Negotiating a successor deal to the SBA and adhering to its policy commitments would be pivotal for accessing external financing and shaping Pakistan's economic trajectory.

Fitch acknowledged the potential challenges in finalizing a new IMF deal, including resistance from vested interests and political instability. However, it remained optimistic that these obstacles could be overcome given the severity of Pakistan's economic challenges and the limited alternatives available.

The agency also warned against prolonged political instability, which could delay discussions with the IMF and hinder the implementation of reforms essential for economic recovery. It highlighted the importance of addressing public discontent and fostering consensus on the need for reform within Pakistan's government.

While acknowledging Pakistan's poor track record in completing IMF programs, Fitch noted some progress under the current SBA and expressed hope for a stronger consensus on reform efforts. However, it cautioned that policy risks could increase if external liquidity pressures eased, emphasizing the need for long-term structural reforms to strengthen Pakistan's external finances.

The report comes in the aftermath of Pakistan's recent general elections, which resulted in a split mandate and ongoing efforts to form a government amidst political uncertainty.