Pakistan’s recent policy adjustments, demonstrated access to externalfinancing, and its commitment to a market-determined exchange rate hasoffset rising external risks from a widening current-account deficit,according to Fitch Ratings.
The rating agency stated in the report ‘Reforms and Financial Support EasePakistan Sovereign Risks’ that if sustained, the ongoing reforms couldcreate positive momentum for the sovereign’s ‘B-’ rating which was affirmedin May 2021 with a Stable Outlook.
It said that increases in global energy prices and a strong domesticrecovery from the initial shock of the pandemic have put additional strainson Pakistan’s external position. The current account deficit in the fiscalyear to June 2022 is set to be wider than its previous forecast of 2.2percent.
The State Bank of Pakistan (SBP) on 19 November 2021 raised its policy rateby a significant 150bp to 8.75 percent, pointing to rising risks related tothe balance of payments and inflation.
“We think external liquidity pressures should be manageable in the nearterm, despite the wider current-account deficit, given Pakistan’s adequateforeign-exchange reserves and success in accessing financing,” it added.
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The official reserve assets nearly doubled to $24.1 billion by the end ofSeptember 2021 from $12.6 billion two years ago. However, liquidforeign-exchange reserves have dropped since mid-September, which maypartly 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 anadditional $1.2 billion oil-financing facility under a one-year supportpackage. Its foreign reserves also received a $2.8 billion boost in Augustfrom the IMF’s one-off global allocation of Special Drawing Rights.
Funding from these sources followed Pakistan’s successful internationaldebt issuance through a $2.5 billion bond in March 2021, and a follow-on $1billion bond as part of its global medium-term note program. Pakistan aimsto tap debt markets more regularly through the scheme, which could reducethe costs of coming to market. Additionally, the authorities plan for newSukuk issuance in 2021.
