Fitch Ratings, a US-based credit rating agency, has affirmed Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC’.
Given the country’s substantial medium-term financing requirements, the ‘CCC’ rating reflects concerns about high external funding risks. Despite some stabilization and Pakistan’s performance on its current Stand-by Arrangement (SBA) with the International Monetary Fund (IMF), Fitch highlights the challenges.
“We expect elections to take place as scheduled in February and a follow-up IMF program to be negotiated quickly after the SBA finishes in March 2024, but there is still the risk of delays and uncertainty around Pakistan’s ability to do this,” stated Fitch in a statement released on Wednesday.
The credit rating agency emphasized that elections could jeopardize recent reforms, posing risks of renewed political volatility. Regarding the ongoing IMF program, Fitch anticipates unproblematic board approval for the recent staff-level agreement (SLA).
Fitch acknowledges the risks related to policy implementation, citing a history of political parties in Pakistan failing to implement or reverse reforms agreed with the IMF. The agency sees a risk that the current consensus on necessary measures could dissipate quickly once economic and external conditions improve.
Fitch suggests that any follow-up IMF program would likely require Pakistan to undertake significant structural reforms, potentially facing resistance from vested interests. On the political front, the agency expects general elections to occur as scheduled in February, foreseeing a coalition government along the lines of Shahbaz Sharif’s government.
The credit rating agency notes ambitious funding targets, with the government aiming for a total gross new external financing of $18 billion in FY24, which includes $1.5 billion in Eurobond/sukuk issuance and $4.5 billion in commercial bank borrowing.
Fitch forecasts a current account deficit (CAD) of about $2 billion in FY24, in line with FY23, driven by contractionary fiscal policies, lower commodity prices, and limited foreign exchange (FX) availability.
While Pakistan’s foreign exchange reserves have recovered on inflows of new funding and limited CADs, Fitch points out that the fiscal deficits remain wide. The consolidated general government (GG) fiscal deficit is expected to narrow to 6.8 percent of GDP in FY24, from an estimated 7.8 percent in FY23.
Despite stable debt dynamics owing to high nominal growth, Fitch highlights concerning metrics such as debt/revenue (over 650pc) and interest/revenue (about 60pc), primarily due to very low revenue/GDP.
