ISLAMABAD: Highlighting some downside economic and political risks, Fitch Ratings has affirmed Pakistan’s long-term rating at ‘B-’ with a stable outlook and economic growth rate at 4.5 per cent this year, down from 5.6pc last fiscal year.

The New York-based agency — one of the three major global rating agencies – noted external vulnerabilities, narrow fiscal revenue base and low governance indicators as key challenges. The rating action was finalised ahead of Prime Minister Imran Khan’s decision to cut energy prices amid rising international prices involving Rs237-250 billion fiscal impact.

The agency welcomed recent reforms to improve public finances and amendments to State Bank of Pakistan (SBP) law but said a challenging external backdrop of high oil prices and global monetary-policy tightening posed risks while political pressure could blunt reform momentum, particularly with the conclusion of the IMF programme in September and elections due by mid-2023.

Affirms stable outlook, says global oil prices pose a risk

It said the recent rebasing of GDP had put Pakistan’s growth rate and most public finance metrics largely in line with peers.

The rating agency said risks from a widening current account deficit are likely to remain manageable in light of policy tightening, though sustained high oil prices pose a clear downside risk. “We forecast the deficit to widen to around 4pc of GDP in the fiscal year ending June 30, from 0.6pc in FY21”, it said, adding the import pressure should ease from the second half of FY22, reducing the deficit to 3pc in FY23.

It expected remittances to remain elevated at current levels over the next couple of years. Strong export performance should also continue, but this comes from a low base.

Fitch said access to external financing from multilateral, bilateral and private creditors had been sustained, facilitated by policy reforms and progress under the IMF’s Extended Fund Facility (EFF) programme. Pakistan raised $1 billion through a seven-year sukuk with a yield of 7.95pc in January and plans further Eurobond issuances in FY22.

The rating agency said the approval of the 6th EFF review – delayed since June 2021 - by the IMF board in January led to a $1bn disbursement. The government plans to complete the three remaining EFF reviews, which would unlock an additional $3bn in financing. “Financing could become more challenging after the IMF programme, particularly given tightening global financial conditions,” said the agency but expected the reforms to sustain market access.

The agency forecast foreign exchange reserves, including gold, to remain stable at around $23bn (3.2 months of current external payments) over the next couple of years, as debt repayments have offset inflows. This is about $11bn above 2019 reserve levels. The commitment to a market-determined exchange rate limits downside risks to reserve.

In the medium, term, Pakistan faced annual external debt repayments of about $13-14bn, including a cumulative $3.8bn in international bond maturities, through FY26.

Published in Dawn, March 2nd, 2022

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