MF Deal or Bust: Pakistan's Looming Economic Catastrophe.

The political situation in Pakistan remains uncertain after the recent elections in February that saw allegations of rigging. Fitch Ratings highlighted the default risks Pakistan faces if it fails to secure another bailout package from the International Monetary Fund (IMF). 

Fitch said getting a new IMF deal is key for Pakistan's credit outlook. They assumed one would be reached within a few months, but a long negotiation or not getting a deal would increase liquidity stress and raise the chance of default. 

Pakistan's external finances have improved recently, with foreign reserves at $8 billion in early February, up from just $2.9 billion in early 2023. However, this is still low compared to projected needs, which are expected to exceed reserves for several more years. 

Fitch estimates Pakistan only met less than half of its $18 billion funding plan for the first two quarters of the current fiscal year ending in June 2024, excluding routine rollovers of bilateral debt. 

Securing financing from multilateral and bilateral partners will be one of the most urgent issues for the new government, according to Fitch. It looks like a coalition between the Pakistan Muslim League-Nawaz and Pakistan Peoples Party will form government, despite strong election results for Imran Khan's Pakistan Tehreek-e-Insaf party.

Negotiating a new IMF deal will be critical for other external financing and strongly influence Pakistan's long-term economic path. Finalizing one may be challenging, as past programs have only seen around half disburse the available funding. However, reform consensus seems stronger now than before.

Continued political instability could prolong IMF talks, delay other assistance, or hamper reforms. Fitch assumes a new government will engage with the IMF quickly, but political stability risks remain high. Public discontent may rise if Imran Khan's party remains sidelined given their election support.

Policy risks could reemerge if external pressures ease due to initial reforms or outside factors like lower oil prices. This could lead to renewed economic and external imbalances unless Pakistan develops a stronger private sector to generate more exports, attract investment, and reduce import reliance.