INTERNATIONAL COMMUNITY CALLS FOR CONTINUATION OF ECONOMIC REFORMS

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By: Maria Mansab

Significantly, on Wednesday, December 12, the international rating agency Fitch maintained Pakistan’s long-term foreign currency issuer default rating at “CCC+” and stated that it anticipates that general elections will occur on time and result in a coalition government “along the lines of Shehbaz Sharif’s government.” The unchanged credit rating is based on last month’s IMF staff-level agreement on the first review of Pakistan’s nine-month standby arrangement (SBA). 

This stability in the rating reflects the international community’s confidence in the current government’s initiatives, emphasizing the importance of the continuation of economic policies and reforms. This confidence is particularly relevant as the IMF Executive Board is slated to consider Pakistan’s first review on January 11, paving the way for the approval of a crucial $700 million tranche. 

Fitch, however, expressed concerns over the uncertainties surrounding the upcoming general elections, urging timely elections to avoid potential political volatility that could impact the implementation of structural reforms and pose economic challenges. Fitch emphasized the importance of conducting elections as scheduled in February and negotiating a follow-up IMF program quickly after the SBA finishes in March 2024. The statement highlighted that any delays in the election process could jeopardize the sustainability of recent economic reforms and political stability.

Furthermore, there is concern among the international community regarding the potential deviation of the newly elected government from the existing policies and reforms, which could jeopardize the sustained progress of the positive economic trajectory of Pakistan. This concern underlines the critical need for the upcoming government to adhere to and build upon the current policies, as endorsed by the international community.

The international community is expressing apprehension that, following the upcoming election, the failure of the new government to uphold the ongoing reforms and initiatives implemented by the present government could lead to a downgrade in Fitch ratings and a potential delay in the crucial IMF deals.

In a statement, Fitch acknowledged the caretaker government’s commendable efforts in fiscal consolidation, energy price reforms, and a crackdown on the black market, which have narrowed the gap between parallel and interbank exchange rates, bringing more foreign exchange into the banking system. This acknowledgment demonstrates the international community’s confidence in the effective measures taken by the current government, reinforcing the importance of these policies being continued by the future government.

Recently, Pakistan has implemented significant initiatives, exemplified by the establishment of the Special Investment Facilitation Council (SIFC), With representation from both civilian and military stakeholders, the SIFC is strategically designed to enhance investor confidence and accelerate the implementation of crucial projects. Notably, the council has approved 28 high-value investment projects valued at billions of dollars, thereby opening avenues for substantial foreign investments in the country.

For economic partnerships, Pakistan is actively exploring strategic options. Notably, the country is considering selling equity in the Reko Diq mines to Saudi Arabia, with Saudi Arabia’s Aramco having already committed to acquiring a 40% equity stake in a Pakistani gas and oil company. Additionally, Pakistan is looking into outsourcing airport management to the UAE, expediting the privatization of the national airline on an accelerated timeline, and expediting a free trade agreement with the UAE under the Comprehensive Economic Partnership Act. These initiatives underscore Pakistan’s commitment to fostering robust economic collaborations and seizing growth opportunities.

Additional measures to address shortfalls in government revenue collection, energy subsidies, and policies inconsistent with a market-determined exchange rate, including import financing restrictions, have been implemented. Pakistan’s current account deficit (CAD) had narrowed sharply, driven by earlier restrictions on imports and FX availability, tighter fiscal and economic policies, measures to limit energy consumption, and lower commodity prices. The current account deficit experienced a substantial decline from $3.1 billion during the same period in FY23 to $1.1 billion during October of FY24.

The international community’s confidence in the present government’s initiatives reinforces the continuation of the economic reforms that have propelled Pakistan toward a trajectory of sustained growth across various industries and economic sectors. Fitch

Ratings and the IMF’s positive assessments and financial support indicate progress in Pakistan’s economic landscape. The economic reformation in Pakistan requires policy continuation and stability. When policies are implemented and continued sustainably by every government in power, the country will start witnessing a turnaround. The concern of a potential downgrade from the international community underscores the critical need for the new government to continue existing reforms and align its policies with its current successful trajectory.

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