Fitch Ratings downgrades Pakistan’s outlook to negative

Fitch Ratings has revised Pakistan’s Outlook to Negative from Stable while affirming its Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘B-‘.

According to the credit rating agency, the Revision of the Outlook to Negative reflects a significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022.

Fitch said that Pakistan’s ‘B-‘ rating reflected recurring external vulnerability, a narrow fiscal revenue base and low governance indicator scores compared with the ‘B’ median.

Fitch Ratings expects IMF board approval of Pakistan’s new staff-level agreement with IMF but see considerable risks to its implementation and continued access to financing after the programme’s expiry in June 2023 in a challenging economic and political climate.

Renewed political volatility cannot be excluded and could undermine the authorities’ fiscal and external adjustment, as happened in early 2022 and 2018, particularly in the current environment of slowing growth and high inflation, it added.

Former Prime Minister Imran Khan, who was ousted in a no-confidence vote on 10 April, has called on the government to hold early elections and has been organizing large-scale protests in cities around the country. The new government is supported by a coalition of parties with only a slim majority in parliament. Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme.

Fitch Ratings stated that limited external funding and large current account deficits (CADs) have drained foreign exchange (FX) reserves, as the State Bank of Pakistan (SBP) has used reserves to slow currency depreciation. Liquid net FX reserves at the SBP declined to about $10 billion or just over one month of current external payments by June 2022, down from about $16 billion a year earlier.

The ratings agency forecast slower economic growth this year, predicting it at 3.5 per cent, compared to the government’s 5 per cent target.

According to Fitch Ratings fiscal and monetary tightening, high imported inflation, and a weaker external demand outlook would all hit household and business confidence in Pakistan.