International rating agency gives new assessment of Pakistani economic situation
Pakistan’s recent policy adjustments, demonstrated access to external financing, and its commitment to a market-determined exchange rate has offset rising external risks from a widening current-account deficit, according to Fitch Ratings.
The rating agency stated in the report ‘Reforms and Financial Support Ease Pakistan Sovereign Risks’ that if sustained, the ongoing reforms could create positive momentum for the sovereign’s ‘B-’ rating which was affirmed in May 2021 with a Stable Outlook.
It said that increases in global energy prices and a strong domestic recovery from the initial shock of the pandemic have put additional strains on Pakistan’s external position. The current account deficit in the fiscal year to June 2022 is set to be wider than its previous forecast of 2.2 percent.
The State Bank of Pakistan (SBP) on 19 November 2021 raised its policy rate by a significant 150bp to 8.75 percent, pointing to rising risks related to the balance of payments and inflation.
“We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing,” it added.
The official reserve assets nearly doubled to $24.1 billion by the end of September 2021 from $12.6 billion two years ago. However, liquid foreign-exchange reserves have dropped since mid-September, which may partly reflect the debt repayment.
Pakistan’s near-term financing efforts have been supported by Saudi Arabia, which plans to place $3 billion on deposit with the SBP and provide an additional $1.2 billion oil-financing facility under a one-year support package. Its foreign reserves also received a $2.8 billion boost in August from the IMF’s one-off global allocation of Special Drawing Rights.
Funding from these sources followed Pakistan’s successful international debt issuance through a $2.5 billion bond in March 2021, and a follow-on $1 billion bond as part of its global medium-term note program. Pakistan aims to tap debt markets more regularly through the scheme, which could reduce the costs of coming to market. Additionally, the authorities plan for new Sukuk issuance in 2021.