External positions have strengthened for most rated frontier sovereigns in Asia, including Pakistan, over the first half of 2021 (H1FY21), reducing downside risks to ratings.
This was stated by Fitch Ratings on Monday in a research report titled “External Liquidity Strains Ease in Some APAC Frontier Economies.”
Where reserves have risen, the increase should provide a cushion against potential difficulties in accessing external finance and associated external liquidity stress, and reduce the likelihood of negative rating action, all else being equal, said Fitch.
Bilateral and multilateral financing has helped support Pakistan’s external positions. Pakistan has benefited from the disbursement of the International Monetary Fund (IMF) resources under its Extended Fund Facility with the completion of the “combined second through fifth reviews” last March, and more recently from Saudi Arabia’s agreement in June to an oil assistance package for Pakistan that could be worth up to $1.5 billion.
According to the report, the expected new allocation of special drawing rights (SDR) by the IMF, which is likely to be approved next August, can bolster Pakistan’s reserves by $2.8 billion.
The report said that Pakistan has raised funds in the international market through bond issuance, easing near-term liquidity pressures. Pakistan raised $2.5 billion in bonds in March.
The report said that in some countries, restrictions and effects associated with Covid-19 have continued to dampen demand for imported goods and services, even as exports have recovered from the initial pandemic shock, bolstering external positions. In Pakistan, the goods trade deficit widened sharply in Q1FY21, driven partly by the higher cost of oil imports.
In Pakistan, the government’s adherence to a market-determined exchange-rate regime will continue to serve as a shock-absorber and should help keep the current account deficit contained. Pandemic-related trade distortions are likely to ebb in the coming months with the rollout of vaccine programmes globally, but this process could be lengthy in countries where vaccination moves slowly.
Remittances have been another source of support to external positions since the start of the pandemic, and remain surprisingly strong, with inflows in May 2021 up by 33.5 per cent in Pakistan, the report said.
