The recent government change in Pakistan has been peaceful, but raisesnear-term policy uncertainty even as the country faces external and fiscalchallenges from rising commodity prices and an increase in global riskaversion, says Fitch Ratings.
The authorities’ policy agenda remains central to Pakistan’s ability torefinance its external debt over the medium term, as well as our assessmentof the rating, which we affirmed at ‘B-’/Stable in February 2022.
The outgoing government lost public support and the backing of coalitionallies against a backdrop of rising inflation. Pakistan’s then primeminister, Imran Khan, initially sought to prevent a no-confidence motionagainst his government. However, his ultimate acceptance of the SupremeCourt’s verdict that it should go ahead and the outcome of the votestrengthens the legitimacy of constitutional mechanisms, in our view.
The recent oil price shock will push up the current-account deficit, addingto already high gross external financing needs from an elevateddebt-repayment schedule. We now forecast a current-account deficit ofaround 5% of GDP (around USD18.5 billion) for the fiscal year ending June2022 (FY22), up from 4% in our February review. We expect this to moderateto around 4% in FY23, as oil prices ease.
Pakistan faces USD20 billion in external debt repayments in FY23, thoughthis includes USD7 billion in Chinese and Saudi deposits that we expect tobe rolled over. Higher trade deficits and capital outflows have driven asharp depreciation of the Pakistani rupee against the US dollar. This,along with debt repayments, has put pressure on liquid foreign-exchangereserves with the State Bank of Pakistan (SBP), which fell from USD5.1billion between end-February and 1 April 2022, to USD11.3 billion. Webelieve the decline also partly reflects the repayment of a USD2.4 billionloan from China that is slated to be renewed.
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The previous government’s implementation of reforms in line with an IMFprogramme helped to underpin its access to global debt markets, in ourview. This was highlighted by Pakistan’s issuance of a USD1 billion Sukukin January 2022. Since then, the country’s access to private creditorfinance has been challenged by external factors, such as rising US interestrates and heightened investor risk aversion around the Ukraine conflict. Webelieve setbacks to reform or the IMF programme would make access even moredifficult.
The change in government may complicate the timely completion of theremaining three reviews of the IMF programme. Senior officials from keyparties in the new government have signalled that they plan to maintainengagement with the IMF. However, negotiations around key revenue-raisingreforms could prove lengthy, particularly as the government is a broadcoalition of disparate political parties. New fuel subsidies introduced inMarch as part of efforts to restrain inflation have already added to thecomplications facing programme negotiations and medium-term fiscalconsolidation, as have upcoming elections, which are still due by mid-2023.
Fitch believes Pakistan has the ability to manage its external liquidityposition in the near term if policy uncertainty is resolved relativelyquickly and commodity prices do not rise substantially above our forecastsfor 2022-2023. We expect its access to bilateral financing to remainrobust, particularly from China. The two countries’ strong bilateralrelationship is unlikely to be significantly weakened by Pakistan’s changein leadership.
