Pakistan’s looming fiscal cliff threatens IMF repayment

Matthew Turner
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ECR experts believe that Pakistan’s imminent debt repayments to the IMF constitute a major threat to its risk rating.

Under the current arrangement, Pakistan is due to make $7.5 billion in repayments to the IMF by November 2015. The country’s FX reserves have fallen in 2012 and now stand at just $9.8 billion, according to Moody’s, leading to concern among analysts about the country’s ability to withstand external shocks. The government missed its original fiscal 2012 deficit target of 4%, returning 6.6% instead.

Raza Agha, chief economist for EMEA at VTB Capital, says: “Pakistan needs to either get into another IMF programme or to be in a position to raise more funds from the World Bank and Asian Development Bank. Failure to make the next round of repayments to the Fund will have a negative impact on the country’s FX reserves and reduce liquidity in the financial system. Its country risk score is likely to decrease further not only because of external pressures but also due to the domestic political situation, with elections scheduled at the end of 2013.”

Pakistan’s high debt burden is reflected in ECR data, which show that the country’s overall ECR score has fallen in 2012. Pakistan’s has fallen by 13 places in the ECR rankings since Q1, to 138th place globally, alongside other tier 5 sovereigns such as Belarus, Kyrgyz Republic and Niger.

Amjad Bashir, chief economist at the Lahore Chamber of Commerce and Industry, says: “Economic activity is slowing, and the election process is going to reduce the government’s ability to raise tax revenue, so I believe they will not be able to meet the targets set by the IMF, just as they have done for the last few years.”

This article was originally published by Euromoney Country Risk