KARACHI: Time is running out for Pakistan’s governmental authorities to address a sharply deteriorating economic situation, Fitch Ratings, one of the world’s leading credit rating agencies, warned on Tuesday. At the heart of the deterioration are the plummeting foreign exchange reserves.

“Pakistan’s declining foreign exchange reserves and widening current account deficit are adding to the country’s external financing risks” said a sharply worded press release issued early in the day. “Further and considerable policy efforts would be required to stabilise the external position, and a new government has limited time to act after the July 25 elections, as external debt obligations will pick up more rapidly in 2019,” the release continued, without elaborating what steps might be required to arrest the trend.

It pointed to “three separate step depreciations since mid-December 2017, of a cumulative 13pc against the dollar” as some of the steps taken by the monetary authorities thus far. Although these “eased some pressure on reserves and may eventually support a narrowing of the current account deficit, but their magnitude so has not been sufficient to prevent external finances deteriorating more sharply” than was expected back in January when the ratings agency last downgraded the outlook on Pakistan’s B rating to ‘negative’.

No change in credit rating, but growth forecast revised down and current account deficit revised up; hints at more exchange rate depreciation

“We now project the current account deficit to reach 5.3pc of GDP in the fiscal year ended June 2018 (FY18), compared with 4.7pc previously. Export performance has improved, but imports have risen on higher oil prices and strong household demand. Loose fiscal policy has added to imbalances.

The fiscal deficit is likely to rise to around 6pc of GDP in FY18, compared to our January forecast of 5.0pc, and the government is becoming increasingly reliant on external borrowing — particularly from Chinese policy banks.”

The situation will be a challenge for the incoming government, though not one that the agency thinks will be unmanageable. “[T]he steeper-than-expected decline in foreign reserves leaves a limited buffer in the event of problems accessing international markets or bilateral lending. China’s continued willingness to provide financing through bilateral and policy-bank lending and likely inflows from the tax amnesty scheme limit near-term risks, as could market expectations of an eventual IMF agreement” the agency said.

Pakistan’s cost of external borrowing has risen since its last bond flotation as yields on its Eurobond floated in November 2017 rising by more than 200 basis points since issuance. Global monetary tightening and rising geopolitical tensions could drive this cost higher still in the months ahead. “Vulnerabilities could be tested as rising debt-servicing payments start to add to external funding requirements from 2019.”

A “significant policy shift” will be required after the elections “to stabilise external finances”, something that the agency says is “still possible”. It did not say what this policy shift might entail, but the thrust of the PML(N)’s economic policy in the last two years was to push for growth via a stable exchange rate and elevated levels of development spending by the government. Fitch said that the measures required off the next government “are likely to slow the economy.”

“We expect the authorities to explore financing options after the elections” the agency said, adding an IMF programme “might become more viable.”

The language suggests that the incoming government will embark on a search for more financing options through bilateral or multilateral arrangements, followed by the possibility of a bond flotation to earn some time, before settling on an IMF programme as a near inevitability.

“Economic growth has been robust over the past year, and we expect the economy to expand by 5.5pc in FY18. However, we have revised down our FY19 growth estimate to 5.0pc, from 5.5pc in the January review, to reflect the likely impact of further tightening measures to alleviate external imbalances.”

Published in Dawn, July 4th, 2018

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