ISLAMABAD: The Standard & Poor’s (S&P) rating agency on Thursday affirmed Pakistan’s ‘B-’ long-term and ‘B’ short-term sovereign rating while maintaining ‘stable’ long-term outlook.

The New York-based rating agency also affirmed ‘B-’ long-term issue rating on Pakistan’s senior unsecured debt and sukuk trust certificates. It said the country’s rating remains constrained by a narrow tax base and domestic and external security risks, which continue to be high.

Although the country’s security situation has gradually improved over the recent years, ongoing vulnerabilities weaken the government’s effectiveness and weigh on the business climate.

It said the Covid-19 pandemic exacerbated Pakistan’s economic downturn but forecast the real GDP to recover to 1.3 per cent during the current fiscal year. “We expect the sovereign’s credit metrics to remain under pressure for the next two to three years”, said the S&P.

The agency, nevertheless, noted that the government had made solid progress toward important fiscal and economic reforms prior to the start of the global coronavirus outbreak, and reform momentum should return once the pandemic was better contained. Multilateral and official funding will remain critical to Pakistan’s external debt sustainability.

It said the stable outlook reflected rating agency’s expectations that funding from the International Monetary Fund (IMF) and other partners, along with a recent improvement in Pakistan’s balance of payments position will be sufficient for the country to meet its considerable external obligations over the next 12 months.

The rating agency said it may lower its “ratings if Pakistan’s fiscal, economic, or external indicators deteriorate further, such that the government’s external debt repayments come under pressure”. Indications of this would include external or fiscal imbalances higher than expected.

Conversely, it may raise ratings on Pakistan if the economy materially outperforms expectations, strengthening the country’s fiscal and external positions more quickly than forecast. It said the progress on reforms was likely to be delayed amid the pandemic.

The ratings reflect the fallout of the Covid-19 pandemic on the country’s already-weak economy, considerable external indebtedness and liquidity needs and an elevated general government fiscal deficit and debt stock.

“While Pakistan had made progress toward consolidating its fiscal accounts during the first nine months of its Extended Funding Facility programme with the IMF, related imbalances have been worsened by much slower economic growth since March 2020”, it noted.

The agency noted in particular that domestic demand in the economy remained very weak, as evident from contractions in both real consumption and imports in the fiscal year ended June 2020. Prospects for a near-term recovery have dimmed following strict domestic virus containment measures implemented between March and June, and in the face of a much weaker global economic outlook.

Despite having stabilised in the first three quarters of the fiscal year, a deep downturn in the April-June period led the Pakistani economy to a full-year contraction of nearly 0.4pc in fiscal year 2020. Renewed weakness in the economy will undermine revenue generation while complicating the government’s efforts to curtail expenditure.

The government is likely to focus on implementing last year’s new revenue measures in the current fiscal period, rather than to introduce additional policies against a backdrop of poor business and consumer sentiment.

Pakistan’s economy is likely to recover only gradually as the global pandemic is progressively better contained. Following Pakistan’s worst economic performance on record in FY20, the agency forecast a modest expansion of 1.3pc in FY21.

Taken together with its relatively fast population growth of approximately 2pc per year, real per capita economic growth will likely remain negative for a third straight year, at -0.7pc. That will contribute to a further decline in Pakistan’s 10-year weighted average per capita growth rate to just 0.6pc, well below the global median of 1.5pc for economies at a similar level of income.

The Pakistani rupee’s approximately 38pc depreciation against the dollar between 2017 and 2020 has also contributed to a considerable decline in the economy’s nominal GDP per capita. “We forecast GDP per capita to remain just above $1,200 by the end of this fiscal year, versus closer to $1,600 in fiscal 2018”.

Growth will also be constrained by domestic security challenges and extended hostility with neighboring India and Afghanistan. The former Pakistan Muslim League government improved the security situation within the country, and we would expect the government to continue this positive momentum.

However, tensions with neighboring India flared on multiple occasions in 2019, and further incidents, especially in the vicinity of the line of control in Kashmir, cannot be ruled out.

After an estimated general government fiscal deficit of 8.1pc of GDP in fiscal 2020, we forecast an elevated shortfall equivalent to 8.5pc of GDP this year, largely owing to revenue constraints amid the weak economy.

Published in Dawn, August 21st, 2020