ISLAMABAD: Highlighting the fuel subsidies as key complications to the International Monetary Fund (IMF) programme, Fitch Ratings has advised Pakistan to clear policy uncertainties rather quickly to address the near-term balance of payments and fiscal challenges.

The New York-based agency — one of the three major global rating agencies — in a special note on Pakistan said the change in government may complicate the timely completion of the remaining three reviews of the IMF programme even though senior officials from key parties in the new government have signalled they planned to maintain engagement with the IMF.

However, negotiations around key revenue-raising reforms could prove lengthy, particularly as the government is a broad coalition of disparate political parties. “New fuel subsidies introduced in March as part of efforts to restrain inflation have already added to the complications facing programme negotiations and medium-term fiscal consolidation, as have upcoming elections, which are still due by mid-2023,” it observed.

Urges quick end to policy uncertainties to cope with fiscal challenges

The agency noted that the recent government change had been peaceful, but raised near-term policy uncertainty even as the country faced external and fiscal challenges from rising commodity prices and an increase in global risk aversion. The authorities’ policy agenda remains central to Pakistan’s ability to refinance its external debt over the medium term, as well as our assessment of the rating, affirmed at ‘B’/Stable in February 2022.

Fitch believed Pakistan had the ability to manage its external liquidity position in the near term if policy uncertainty was resolved relatively quickly and commodity prices do not rise substantially above forecasts for 2022-23. It expected Pakistan’s access to bilateral financing to remain robust, particularly from China. The two countries’ strong bilateral relationship is unlikely to be significantly weakened by Pakistan’s change in leadership.

The change in government will test how institutionalised recent reforms, such as the independence of the SBP and the more market-determined exchange rate, are, the Fitch said adding it would view slippage on reform momentum as credit negative. In the longer term, if the authorities are unable to pursue fiscal consolidation, Pakistan’s access to market financing would remain constrained.

Fitch said the outgoing government lost public support and the backing of coalition allies against a backdrop of rising inflation. Pakistan’s then Prime Minister, Imran Khan, initially sought to prevent a no-confidence motion against his government. However, his ultimate acceptance of the Supreme Court’s verdict that it should go ahead and the outcome of the vote strengthens the legitimacy of constitutional mechanisms.

The recent oil price shock will push up the current-account deficit, adding to already high gross external financing needs from an elevated debt-repayment schedule. “We now forecast a current-account deficit of around 5pc of GDP (around $18.5bn) for the fiscal year ending June 2022 (FY22), up from 4pc in February review. We expect this to moderate to around 4pc in FY23, as oil prices ease”.

Pakistan faces $20bn in external debt repayments in FY23, though this includes $7bn in Chinese and Saudi deposits expected to be rolled over. Higher trade deficits and capital outflows have driven a sharp depreciation of the Pakistani rupee against the US dollar. This, along with debt repayments, has put pressure on liquid foreign-exchange reserves with the State Bank of Pakistan (SBP), which fell by $5.1bn between end-February and April 1, 2022, to $11.3bn.

Published in Dawn, April 13th, 2022