ISLAMABAD: After Moody’s downgrade, global rating agency Fitch on Friday also cut Pakistan’s long-term foreign currency issuer default rating (IDR) to ‘CCC+’ from ‘B-’ due to worsening liquidity, political volatility and resultant policy risks.

The New York-based agency — one of the three major global rating agencies – said it did not typically assign outlooks to sovereigns with a rating of ‘CCC+’ or below. On Oct 6, Moody’s downgraded Pakistan’s local and foreign currency and senior unsecured debt ratings to Caa1 from B3 for increased government liquidity and external vulnerability risks and higher debt sustainability amid strong protest by Pakistan.

Fitch said the downgrade reflected a further deterioration in Pakistan’s external liquidity and funding conditions and the decline of foreign exchange reserves. This is partly a result of widespread floods, which will undermine Pakistan’s efforts to rein in twin fiscal and current account deficits.

“The downgrade also reflects our view of increased risks of policies potentially undermining Pakistan’s IMF programme and official financial support,” it said while noting that liquid net forex reserves of the State Bank of Pakistan (SBP) were about $7.6bn by Oct 14, or about a month of current external payments, down from more than $20bn at end-August 2021. “Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier FX interventions by the SBP”, it noted.

Agency says political instability deepens after PTI wins by-polls

On top of this, former prime minister Imran Khan, who was ousted in a no-confidence vote on April 10, continues to put political pressure on the government, organising protests across the country calling for early elections. Mr Khan’s PTI party won by-elections in the key Punjab province in July, defeating the incumbent PML-N, and PTI won more national and provincial seats in by-elections on Oct 17. Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme due in June.

The rating agency noted that CAD reached $17bn (4.6pc of GDP) in the fiscal year to June 2022 (FY22), driven by soaring oil prices and higher non-oil imports on strong private consumption. Fiscal tightening, higher interest rates and measures to limit energy consumption and imports underpin the forecast for the CAD to narrow to $10bn (2.7pc of GDP) in FY23, despite the hit to export revenue and import needs after the recent floods. Lower imports and commodity prices helped to narrow the CAD in recent months, to about $300 million in September.

Pakistan’s external public debt maturities in FY23 are over $21bn, primarily to bilateral and multilateral creditors, which mitigate rollover risks. There are already agreements to roll over some of these, the statement noted adding that the official estimate put the flood damage at $10 -30bn. Still, reconstruction costs were likely to be lower, as was the impact on Pakistan’s twin deficits.

Fitch said Pakistan recently received funding commitments of $2.5bn from the World Bank and Asian Development Bank but noted that much of this was repurposed from ongoing programmes. “It remains unclear to what degree the IMF will be able to relax Pakistan’s programme targets, or augment Pakistan’s access under the EFF”, it said.

Fitch assumed Pakistan to continue to receive disbursements under its IMF programme, but noted higher risks but some of its risk assessments have already been addressed by the authorities. This includes “fuel-price cuts from October 1” that may not be compatible with commitments to the IMF and ‘yet to happen quarterly electricity tariff adjustment due in October”. Both these measures have already been implemented through revised notifications.

Fitch said new finance minister Dar had re-affirmed commitment to the IMF programme, but preferred a strong exchange rate, and may revisit the SBP law that was amended in early 2022 to grant the SBP greater autonomy, as previously agreed with the IMF.

Fitch said its rating action also reflected the official statements regarding debt rescheduling. The previous finance minister (Miftah Ismail) said before resigning that Pakistan would seek debt relief from non-commercial creditors, although he reiterated the intention to repay the $1bn bond due in December 2022. Prime Minister Shehbaz Sharif also appealed for debt relief within the Paris Club framework.

More recently, however, the Minister of Finance Dar has publicly ruled this out. Pakistan’s debt to private creditors (or official Paris Club creditors) is only a small fraction of the total and the authorities maintain that they have no intention to restructure debt to private creditors.

Fitch forecast a narrowing of the fiscal deficit to 6.2pc of GDP (about Rs5 trillion or $23bn) in FY23 (against 7.9pc in FY22), driven by some spending restraint and higher taxes. It also forecasts debt/GDP to fall to 70pc in FY23 from 73pc in FY22 and continue decreasing, helped by high inflation and a modest primary deficit. It estimated the GDP growth rate at 2pc against 6pc last year.

Published in Dawn, October 22th, 2022