HONG KONG: Fitch Ratings on Monday revised Pakistan’s Outlook to Negative from Stable, while affirming its Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘B-‘.
In a statement the international rating agency said that the revision of the Outlook to Negative reflects significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022.
“We assume IMF board approval of Pakistan’s new staff-level agreement with the IMF, but see considerable risks to its implementation and to continued access to financing after the programme’s expiry in June 2023 in a tough economic and political climate,” it added.
According to the rating agency renewed political volatility cannot be excluded and could undermine the authorities’ fiscal and external adjustment, as happened in early 2022 and 2018, particularly in the current environment of slowing growth and high inflation.
Former Prime Minister Imran Khan, who was ousted in a no-confidence vote on April 10, 2022, has called on the government to hold early elections and has been organizing large-scale protests in cities around the country.
The new government is supported by a disparate coalition of parties with only a slim majority in parliament. Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme.
The rating agency said that limited external funding and large current account deficits (CADs) have drained foreign exchange (FX) reserves, as the State Bank of Pakistan (SBP) has used reserves to slow currency depreciation. Liquid net FX reserves at the SBP declined to about $10 billion or just over one month of current external payments by June 2022, down from about $16 billion a year earlier.
The raging agency estimate the current account deficit reached $17 billion (4.6 per cent of GDP) in fiscal year ended June 2022 (FY22), driven by soaring global oil prices and a rise in non-oil imports boosted by strong private consumption.
Fiscal tightening, higher interest rates, measures to limit energy consumption and imports underpin our forecast of a narrowing CAD to $10 billion (2.6 per cent of GDP) in FY23.
The rating agency said that public debt maturities in FY23 are about $21 billion. Maturities of about $9 billion are to bilateral creditors (chiefly Saudi Arabia and China), which should be fairly easy to roll over with an IMF programme in place.
“Much of the $5 billion in debt to commercial banks is also to China. Staff-level agreement will potentially unlock $4 billion in IMF disbursements to Pakistan in FY23, assuming board approval of a $1 billion augmentation and extension to June 2023,” it added.
Fitch rating estimates that the fiscal deficit widened to 7.5 per cent of GDP (nearly PKR5 trillion) in FY22, from 6.1 per cent in FY21. Tax reductions and subsidies on fuel and electricity account for most of the fiscal deterioration; these were introduced by the previous government in February and lasted until June.
“We expect a narrowing of the deficit to 5.6 per cent of GDP (about PKR4.6 trillion or $22 billion) in FY23, driven by spending restraint as well as by expanded taxation, including higher corporate and personal income taxes and increases in the petroleum levy. Our forecast of the fiscal deficit is about 1 per cent of GDP wider than the authorities’ target,” the rating agency added.
