Pakistani economy and remittances to face setback in 2021

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Pakistani economy and remittances to face setback in 2021

Fitch Ratings, in its special report “APAC remittances and the coronavirus shock”, has stated that remittances are set to decline in 2020 despite a recovery in recent months, and forecasts Pakistan current account deficit to widen to 1.7 percent of GDP in the fiscal year 2021, in part as remittances fall and offset gains from lower oil prices.

Pakistan has reduced its current account deficit, from a high of 6.1 percent of GDP in the fiscal year ending June 2018 (FY18) to 1.1 percent in the fiscal year 2020. It has also modestly rebuilt foreign-exchange reserves, in large part from a shift to a more market-determined exchange rate.

High debt-to-GDP ratios in Pakistan constrain the ability to respond to possible rising social-spending needs, said Fitch Ratings.

Fitch forecasts the deficit to widen to 1.7 percent of GDP in the fiscal year 2021, in part as remittances fall and offset gains from lower oil prices. Financing from the IMF through an ongoing $6 billion program and $1.4 billion Rapid Financing Instrument (RFI) facility, along with other multilateral and bilateral support and participation in the G20s Debt Service Suspension Initiative, are a buffer against the fall in remittances.

For countries with fragile external finances, such as Pakistan and Sri Lanka, the expected shock to remittances could exacerbate existing challenges, said the report.

High debt-to-GDP ratios in Sri Lanka (86.8 percent), Pakistan (86.1 percent), and India (71 percent) constrain the ability of these countries to respond to possible rising social-spending needs.