Fitch affirms Pakistan's rating at 'CCC' with stable outlook

In its recent assessment, US-based credit rating agency Fitch Ratings has chosen to affirm Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC'.

Despite some improvements and a successful review of its Stand-by Arrangement (SBA) with the International Monetary Fund (IMF), Pakistan continues to grapple with high external funding risks and faces challenges in policy implementation and political stability.

“The ‘CCC’ rating reflects high external funding risks amid high medium-term financing requirements, despite some stabilisation and Pakistan’s strong performance on its current Stand-by Arrangement (SBA) with the International Monetary Fund (IMF),” said Fitch in a statement released on Wednesday.

“We expect elections to take place as scheduled in February and a follow-up IMF programme to be negotiated quickly after the SBA finishes in March 2024, but there is still the risk of delays and uncertainty around Pakistan’s ability to do this,” stated Fitch.

The credit rating agency emphasised that elections could jeopardise recent reforms, posing risks of renewed political volatility. Regarding the ongoing IMF programme, Fitch anticipates unproblematic board approval for the recent staff-level agreement (SLA).

Fitch acknowledges the risks related to policy implementation, citing a history of political parties in Pakistan failing to implement or reverse reforms agreed with the IMF.

“We see a risk that the current consensus within Pakistan on the measures necessary to ensure continued funding could dissipate quickly once economic and external conditions improve, although Pakistan now has fewer financing options than in the past.

“Any follow-up IMF programme would likely require Pakistan to undertake sweeping structural reforms in opposition to entrenched vested interests,” it said.

Read also: Fitch upgrades Pak credit rating by a notch

On the political front, the agency expects general elections to occur as scheduled in February, foreseeing a coalition government along the lines of Shehbaz Sharif’s PDM government.

A notable positive development has been the successful November review of the nine-month SBA, signalling continued fiscal consolidation, energy price reforms, and a shift toward a more market-driven exchange rate regime.

The caretaker government, in office since August, has implemented additional measures, including substantial hikes in natural gas and electricity prices and a crackdown on the black market. These actions have helped narrow the gap between parallel and interbank exchange rates, bringing more foreign exchange into the banking system.

On the funding front, recent disbursements from the IMF, Saudi Arabia, and the UAE have provided some relief. However, the government's ambitious target of securing $18 billion in external financing for FY24, against nearly $9 billion in government debt maturities, poses a considerable challenge.

The current account deficit is expected to improve to about $2 billion (below 1% of GDP) in FY24, driven by contractionary fiscal policies, lower commodity prices, and limited foreign exchange availability. Despite an uptick in FX reserves, which stood at $12.7 billion in October 2023, challenges persist, with reserves still well below the peak of $23 billion at the end of 2021.

Fiscal deficits are projected to narrow, benefiting from inflation, new revenue measures, and spending discipline. However, further fiscal consolidation remains challenging.

“Nevertheless, debt/revenue (over 650%) and interest/revenue (about 60%) are far worse than that of peers, largely due to very low revenue/GDP,” it said.