ISLAMABAD – Fitch Ratings, a Singapore based rating agency said aftergeneral elections the new government to resolve external financingsituation, the most viable option would be to shake hands withInternational Monetary Fund (IMF) to boost foreign exchange reserves andmeet external debt obligation which will pick more rapidly in 2019.
“We expect the authorities to explore financing options after the electionswhen, for example, an agreement with the IMF might become more viable,”said Fitch Rating agency.
Pakistan s last three-year IMF program, which began in September 2016,supported a recovery in foreign reserves and was marked by a shift tomacroeconomic policy more focused on stability.
Fitch Ratings said Pakistan s declining foreign exchange reserves andwidening current account deficit are adding to the country s externalfinancing risks. Further and considerable policy efforts would be requiredto stabilize the external position, and a new government has limited timeto act after the 25 July elections, as external debt obligations will pickup more rapidly in 2019.
The monetary authorities have taken some steps in recent months to addressthe deterioration in the external position. The State Bank of Pakistan hasincreased its policy rate twice, by a cumulative 75 basis points, sincemid-January to cool domestic demand. It has also introduced greaterflexibility in the heavily managed rupee by allowing three separate stepdepreciations since mid-December 2017, of a cumulative 13% against the USdollar.
These policies have eased some pressure on reserves and may eventuallysupport a narrowing of the current account deficit, but their magnitude sofar has not been sufficient to prevent external finances deteriorating moresharply than we expected when we placed Pakistan s sovereign rating of Bon Negative Outlook in January.
“We now project the current account deficit to reach 5.3 percent of GDP inthe fiscal year ended June 2018 (FY18), compared with 4.7 percentpreviously”, the rating agency said.
Export performance has improved, but imports have risen on higher oilprices and strong household demand. Loose fiscal policy has added toimbalances.
The fiscal deficit is likely to rise to around 6 percent of GDP in FY18,compared to our January forecast of 5.0 percent, and the government isbecoming increasingly reliant on external borrowing – particularly fromChinese policy banks.
Meanwhile, the steeper-than-expected decline in foreign reserves leaves alimited buffer in the event of problems accessing international markets orbilateral lending. China s continued willingness to provide financingthrough bilateral and policy-bank lending and likely inflows from the taxamnesty scheme limit near-term risks, as could market expectations of aneventual IMF agreement.
Nevertheless, Pakistan s cost of external market financing has risen inrecent months, with yields on the government s November 2017 10-yearEurobond up more than 200bp since issuance.
The cost could increase further amid continued global monetary tighteningand rising geopolitical pressures. Vulnerabilities could be tested asrising debt-servicing payments start to add to external fundingrequirements from 2019.
A significant policy shift to stabilise external finances is still possiblefollowing the general elections, when a newly elected government may havemore political leeway to implement measures that are likely to slow theeconomy. In January we noted that the upcoming elections were likely toconstrain the government s ability to address external problemsconvincingly in the near term.
The PML-N led government passed an FY19 budget in early June, which laysout a consolidation plan and tax reform, although similar consolidationtargets have been missed in recent years. Opposition parties have alsoemphasised the need to reduce the budget deficit.
Economic growth has been robust over the past year, and we expect theeconomy to expand by 5.5% in FY18. However, we have revised down our FY19growth estimate to 5.0%, from 5.5% in the January review, to reflect thelikely impact of further tightening measures to alleviate externalimbalances.