Fitch predicts technocrat takeover if PML-N fails

Credit rater sees little chance of Imran's release in the foreseeable future

KARACH:

Global credit rating agency Fitch has predicted a technocrat set-up in Pakistan in case the Pakistan Muslim League-Nawaz (PML-N) government is ousted.

In its latest report on Pakistan, the agency projected that the PML-N led coalition government will remain in power for the next 18 months with no immediate plans for fresh elections.

The incumbent government will continue to implement the reforms mandated by the International Monetary Fund (IMF) that will enable the economy to grow, the report said.

However, Fitch mentioned that political upheaval might affect the economic activities in Pakistan along with the impacts of climate change, including floods and drought.

According to the rating agency, former prime minister Imran Khan is unlikely to get released from jail in the foreseeable future despite getting relief in a number of cases.

The agency went on to predict that the next general elections in Pakistan will be held in 2029.

On the economic front, Pakistan’s current account deficit is projected to remain 1% in FY2024/25.

The Fitch report suggested that the State Bank of Pakistan (SBP) might reduce its key policy rate from 22% to 16% in 2024.

However, Fitch took an optimistic view on Pakistan’s fragile economic trajectory, projecting growth improving to 3.2% on the back of a significant cut in interest rate and nominal drop in rupee-dollar exchange rate and moderate current account deficit in the just started fiscal year 2024-25.

It, however, projected the government would miss its ‘ambitious budget targets’ in FY25, while “the current PML-N government will remain in power over the coming 18 months and will succeed in pushing through with IMF-mandated fiscal reforms… Despite several successful legal appeals, opposition leader Imran Khan will remain imprisoned for the foreseeable future.”

Fitch said the economic growth in Pakistan will accelerate from 2.4% in FY2023-24 to 3.2% in FY2024-25, driven by monetary easing, improved agricultural output and slowing inflation. “Risks are heavily weighted to the downside.”

As Fitch had predicted, the economic activity in Pakistan was stronger than most analysts had expected in FY2023-24 (July 2023-June 2024), the report said.

It anticipated Pakistan’s current account deficit will remain small but will widen from 0.8% of GDP in FY2023-24 to 1% of GDP in FY2024-25. “The slightly wider overall deficit will be due to a larger trade deficit, which will widen from 7.5% of GDP in FY24 to 7.7% of GDP in FY25. Risks are weighted towards a wider deficit, which could be caused by a jump in oil prices or lower-than-expected grain production.”

Pakistani policymakers have had more success than Fitch had expected in stabilising the rupee, and it now foresees “the big falls in the currency are behind us. We expect that the rupee will only weaken a touch over the remainder of 2024, slipping from Rs278/$ to Rs290/$ (and to Rs310/$ in 2025). Risks remain weighted heavily towards a larger rather than a smaller depreciation.”

Easing inflation in Pakistan will provide the State Bank of Pakistan (SBP) with the space to cut its key policy rate from 22% to 16% in 2024. It expects that policymakers at the SBP will continue to loosen policy over the longer term, to 14% by end of 2025. The key risk to this forecast is towards faster-than-expected inflation, which would cause policymakers to slow their easing cycle.

Fitch Solutions expects that Pakistani policymakers will miss their ambitious budget targets, but it still expects that the deficit will narrow, slipping from 7.4% in FY24 to 6.7% of GDP in FY25. Provided that the government remains on the current policy trajectory, the country will probably succeed in negotiating a longer-term deal with the IMF. Risks remain weighted towards a much larger deficit. The economic recovery is fragile and another shock would quickly push up the cost of servicing Pakistan’s large government debt burden.

The risks to Fitch growth outlook are heavily weighted to the downside. Pakistan’s economy remains very fragile in the face of external shocks. Given that 40% of Pakistanis work in agriculture, another flood or drought would pose a significant risk to the economy.

The report noted that the country’s fragile political situation could also derail the recovery, adding that another round of protests in urban areas could disrupt economic activity.

“In the unlikely event that the government is replaced, the most likely alternative is a military-backed technocratic administration rather than fresh elections,” it said.