STUCK in a protracted cycle of stagflation, Pakistan’s economy faces numerous challenges. Some of these pertain to long-standing structural issues such as low tax revenue, a large energy-sector debt, the massive losses of SOEs and low exports.

Others are of a more immediate nature and relate to a weakened balance-of-payments position amid few foreign, private and commercial inflows; they persist despite the new IMF programme.

The continuing political discord is not helping either. No wonder Fitch, one of the three biggest global rating agencies, has emphasised high external funding risks, despite some stabilisation and a strong performance on the Stand-by Arrangement with the IMF, as well as uncertainty regarding the near-term political outlook.

While it upgraded Pakistan’s long-term foreign currency issuer default rating from ‘CCC-’ to ‘CCC’ in July, following the approval of the $3bn IMF loan, the current rating still indicates significant country credit risk.

Fitch believes that Pakistan is facing external funding risks given its high medium-term financing needs. “Pakistan’s overall external funding targets of $18bn (gross) for the current fiscal year were ambitious against nearly $9bn in government debt maturities.

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The maturing debt includes a $1bn bond due in April and $3.8bn to multilateral creditors but excludes routine rollovers of bilateral deposits,“ it said, adding that the targeted $1.5bn in Eurobond/ Sukuk issuance and $4.5bn in commercial bank borrowing “will likely prove challenging”.

On the political situation, which has implications for the economy, and the next government’s ability to implement policy reforms and negotiate a new bigger and more long-term bailout with the IMF, Fitch says it expects elections to take place as scheduled and produce a coalition set-up.

However, it is concerned over the uncertainties surrounding the elections and the ensuing potential political volatility, which could impact the implementation of structural reforms and pose economic challenges.

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

The underlying message Fitch has sent across is clear: Pakistan’s political conditions post elections will determine its economic trajectory. The concern is not without valid reason. We have a long history of ditching and reversing reforms agreed with the IMF and other lenders.

Political consensus on measures crucial to ensuring sustainable growth dissipates once economic and external conditions start to show improvement in the wake of rising foreign inflows.

However, political discord and volatility arising from a vote sans credibility will likely increase the chances of the next government digressing from the path of reforms long before the economy stabilises. That would be disastrous for the country.

Published in Dawn, December 15th, 2023