Fitch predicts economic challenges will persist despite political shifts
Despite the change in political configuration, the challenges remain the same and the problems of inflation, external risks and supply disruption are expected to weigh heavily on the Pakistani economy in the days to come.
“The recent change of government in Pakistan has been peaceful, however, it raises short-term political uncertainty as the country faces external and fiscal challenges related to rising commodity prices and an increase in global risk aversion,” Fitch Ratings said in a statement Tuesday.
“The authorities’ policy agenda remains central to Pakistan’s ability to refinance its medium-term external debt, as well as our rating assessment, which we affirmed at ‘B-‘/stable in February 2022.”
He was of the view that the recent oil price shock would aggravate the current account deficit, adding to the already high gross external financing needs resulting from a high debt repayment schedule.
“We now expect a current account deficit of about 5% of GDP (about $18.5 billion) for the fiscal year ending in June 2022, down from 4% in the February review,” the official said. ‘rating agency.
“We expect this to moderate to around 4% in fiscal year 2022-23 as oil prices decline.”
Pakistan faces $20 billion in external debt repayments in the 2022-23 financial year, though this includes $7 billion in Chinese and Saudi deposits that Fitch says will be rolled over.
Higher trade deficits and capital outflows caused the Pakistani rupee to depreciate sharply against the US dollar. This, together with debt repayments, put pressure on the liquid foreign exchange reserves of the State Bank of Pakistan (SBP), which fell by $5.1 billion between the end of February and April 1, 2022 to reach $11.3 billion.
“We believe the decline also partly reflects the repayment of a $2.4 billion loan from China that is due for renewal,” he said.
The implementation of reforms by the previous government, in line with the $6 billion program of the International Monetary Fund (IMF), helped strengthen its access to global debt markets.
It was highlighted by Pakistan’s issuance of a $1 billion Sukuk in January 2022.
Since then, the country’s access to financing from private creditors has been challenged by external factors, such as rising US interest rates and heightened investor risk aversion around the Ukraine conflict.
“We believe setbacks in reform or the IMF program would make access even more difficult,” Fitch said.
The change of government could complicate the timely completion of the three remaining IMF program reviews.
Senior officials from the main parties in the new government have indicated that they plan to maintain their engagement with the IMF. However, negotiations around key revenue-raising reforms could prove lengthy, especially as the government is a broad coalition of disparate political parties.
New fuel subsidies introduced in March as part of efforts to contain inflation have already added to the complications facing negotiations on medium-term program and fiscal consolidation, as have the upcoming elections, which are still planned by mid-2023.
Fitch believes Pakistan has the ability to manage its short-term external liquidity position if political uncertainty is resolved relatively quickly and commodity prices do not rise materially above forecasts for 2022-23.
“We expect its access to bilateral funding to remain robust, particularly from China. The strong bilateral relationship between the two countries is unlikely to be significantly weakened by Pakistan’s change in leadership.
The change of government will test the degree of institutionalization of recent reforms, such as the independence of the SBP and the more market-determined exchange rate.
“We would consider the slippage of the reform momentum as a negative credit. Looking further ahead, if the authorities are unable to pursue fiscal consolidation, we expect Pakistan’s access to market funding to remain constrained,” the rating agency said.