Pakistan earns rating upgrade from Fitch

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• Agency warns of a downgrade if delay in IMF review causes liquidity crunch
• CAD predicted to stay at $4bn

ISLAMABAD: While highlighting political risks to strong reform commitments and tough budgetary measures by a weak coalition government, Fitch Ratings on Monday upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC’.

The upgrade came about mainly due to easing external financing challenges and a new IMF programme, said Fitch, one of the top three global rating agencies.

The agency warned that Pakistan’s rating could be downgraded in case of “renewed deterioration in external liquidity conditions that could result from delays in IMF programme reviews, or indications that the authorities are considering debt restructuring”.

Conversely, the rating could improve owing to sustained recovery in foreign-currency reserves and further significant easing of external financing risks.

“The upgrade reflects greater certainty over continued availability of external funding, in the context of Pakistan’s staff-level agreement (SLA) with the IMF on a new 37-month $7 billion Extended Fund Facility (EFF),” it said.

A strong performance on the previous nine-month Standby Arrangement helped the country narrow fiscal deficits and rebuild foreign exchange reserves, and further improvements are likely, the agency added, but warned that the country’s large funding needs leave it vulnerable if it fails to implement challenging reforms, which could undermine programme performance and funding.

In December last year, Fitch Ratings had kept unchanged Pakistan’s long-term foreign currency issuer default rating (IDR) at ‘CCC’. It had upgraded the rating in July of last year from ‘CCC-’.

Fitch Rating had previously downgraded the country’s rating from ‘CCC+’ in Oct 2022 to ‘CCC-’ in February last year, before upgrading again to ‘CCC’ in July.

The rating agency expects the IMF’s executive board will approve the new programme by the end of next month. As disclosed by Finance Minister Muhammad Aurangzeb on Sunday, Fitch Ratings has confirmed that Pakistan “will have to obtain new funding assurances from bilateral partners, chiefly Saudi Arabia, the UAE and China”, worth $4-5bn over the duration of the EFF. The agency believes this is achievable.

The agency said the government had taken in hand “ambitious reforms” under the new EFF to tackle structural weaknesses in the tax system, energy sector and state-owned enterprises.

“Higher taxes are premised on introduction of taxation on the country’s agriculture sector, which will have to be legislated at the provincial level”, the statement said.

Fitch forecast a narrow current account deficit, staying relatively contained at about $4bn (about 1pc of GDP) in FY25, after about $700 million in FY24, given tight financing conditions and subdued domestic demand. Yet, the funding needs still remain large.

Besides this external deficit, Pakistan faced over $22bn in external public debt maturities in FY25, the rating agency highlighted. Of the total maturities, $13bn is in the form of bilateral deposits and loans that are regularly rolled over, including nearly $4bn in liabilities of the State Bank of Pakistan.

Published in Dawn, July 30th, 2024

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