Fitch affirms Pakistan's credit rating at 'CCC'

 Fitch Ratings has affirmed Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC'..

The 'CCC' rating reflected high external funding risks amid high medium-term financing requirements, despite some stabilisation and Pakistan's strong performance on its current Stand-by Arrangement (SBA) with the IMF.

Fitch expects elections as scheduled in February and a follow-up IMF programme quickly after the SBA is completed in March 2024, but there is still the risk of delays and uncertainty around Pakistan's ability to do this.

It states: “In November, Pakistan and the IMF reached a staff-level agreement (SLA) on the first review of the country's nine-month SBA, which was approved by the IMF Executive Board in July 2023.

“We expect board approval of the recent SLA to be unproblematic. The successful programme review reflects continued fiscal consolidation, energy price reforms in the face of a public backlash, and moves towards a more market-determined exchange rate regime.

“Many of Pakistan's policy commitments under the SBA had been frontloaded, but Pakistan's caretaker government has also taken new measures, including hikes in gas and electricity tariff and a crackdown on the black market, helping narrow the gap between the parallel (kerb) and interbank exchange rates and bringing more FX into the banking system.

“In June, the previous government amended its proposed FY24 budget to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February.

“And general elections to take place as scheduled in February, and to produce a coalition government along the lines of Shebhaz Sharif's government. Former prime minister Imran Khan's Pakistan Tehreek-e-Insaf party likely remains popular, but its electoral prospects may be limited by Mr Khan's imprisonment and the departure of senior leaders. Space for political expression has shrunk since widespread protests in May 2023. Nevertheless, further delays to elections or renewed political volatility cannot be excluded and would jeopardise IMF negotiations and external funding.

It continued: “We forecast a current account deficit (CAD) of about $2 billion (below 1% of GDP) in FY24, in line with FY23. Contractionary fiscal policies, lower commodity prices and limited FX availability have sharply narrowed Pakistan's CAD from over $17 billion in FY22. Tight financing conditions, rupee depreciation and weak domestic demand will likely continue to constrain the CAD. The authorities intend for imports to be financed through banks, limiting the drain on official reserves. Still, banks have resorted to ad hoc, informal measures to prioritise access to FX by clients.

 “Pakistan's FX reserves have recovered on inflows of new funding and limited CADs, and we expect further increases. The central bank's net liquid FX reserves have been hovering at just over $7 billion since October 2023 (about two months of imports), from a low of about $3 billion in January.

“We expect the consolidated general government (GG) fiscal deficit to narrow to 6.8% of GDP in FY24, from an estimated 7.8% in FY23, driven by an improvement in the primary balance to a surplus of 0.3% of GDP, from a primary deficit of 0.8% of GDP in FY23.