KARACHI: Fitch Ratings on Tuesday downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC-‘, from ‘CCC+’.
The rating agency said that there is no outlook assigned, as Fitch typically does not assign Outlooks to ratings of ‘CCC+’ or below.
The downgrade reflects further sharp deterioration in external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves to critically low levels. While we assume a successful conclusion of the 9th review of Pakistan’s IMF programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility.
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Liquid net foreign exchange reserves of the State Bank of Pakistan (SBP) were about $2.9 billion on February 03, 2023, or less than three weeks of imports, down from a peak of more than $20 billion at end-August 2021.
Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing and earlier FX intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place.
The rating agency expects reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap.
External public-debt maturities in the remainder of the fiscal year ending June 2023 (FY23) amount to over $7 billion and will remain high in FY24. Of the $7 billion remaining for FY23, $3 billion represent deposits from China (SAFE) that are likely to be rolled over, and $1.7 billion are loans from Chinese commercial banks which we also assume will be refinanced in the near future. The SAFE deposits are scheduled to mature in two instalments: $2 billion in March and $1 billion in June.
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Pakistan’s Current Account Deficit (CAD) was $3.7 billion in 2H22, down from $9 billion in 2H21. As such, we forecast a full-year deficit of $4.7 billion (1.5 per cent of GDP) in FY23 after $17 billion (4.6 per cent of GDP) in FY22.
The narrowing of the CAD has been driven by restrictions on imports and FX availability, as well as by fiscal tightening, higher interest rates and measures to limit energy consumption.
Reported backlogs of unpaid imports in Pakistan’s ports indicate that the CAD could increase once more funding becomes available. Nevertheless, exchange-rate depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after they were partly switched to unofficial channels in 4Q22 to benefit from more favourable exchange rates in the parallel market.
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Shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate have held up the 9th review of Pakistan’s IMF programme, which was originally due in November 2022. We understand that completion of the review hinges on additional front-loaded revenue measures and increases to regulated electricity and fuel prices, it said.
The IMF’s conditions are likely to prove socially and politically difficult amid a sharp economic slowdown, high inflation, and the devastation wrought by widespread floods last year. Elections are due by October 2023, and former Prime Minister Imran Khan, whose party will challenge the incumbent government in the elections, earlier rejected an invitation by Prime Minister Shehbhaz Sharif to hold talks on national issues, including IMF negotiations.