Fitch Ratings has downgraded Pakistan’s credit rating outlook to negative from stable despite it strongly expects the International Monetary Fund (IMF) is very close to reviving its $7 billion loan programme for Islamabad soon.
The global credit rating agency gave the reason that it foresaw that the country may fail to implement its commitments with the IMF in letter and spirit, and face shortfall in foreign funding once the loan programme ends in June 2023.
“Fitch Ratings has revised Pakistan’s outlook to negative from stable, while affirming its long-term foreign currency (LTFC) issuer default rating (IDR) at ‘B-’,” the agency said on Tuesday.
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.”
The rating agency estimated that the IMF would increase the amount of loan programme by $1 billion to a total of $7 billion and extend its duration till June 2023.
Earlier, the loan volume stood at $6 billion and was to expire in September 2022. The IMF has already released $3 billion under the programme.
However, the political landscape has become challenging in the country after the PTI won Punjab’s by-poll with a big margin. The election result is a big upset for the PML-N led coalition government in the centre.
This has again sparked political uncertainty in the country and mounted pressure on the economy.
“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,” it said.
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 organising 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.”
It 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.
“We estimate the CAD reached $17 billion (4.6% 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% of GDP) in FY23.”
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.
The SBP estimates that the economy was operating above potential in FY22, and “we forecast slower growth of 3.5% in FY23 amid fiscal and monetary tightening, high imported inflation, and a weaker external demand outlook, all of which will also hit household and business confidence.”
Published in The Express Tribune, July 20th, 2022.
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