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Pakistan’s recent policy measures

Fitch Ratings believes Pakistan’s recent policy adjustments and demonstrated access to external financing, as well as its commitment to a market-determined exchange rate, offset rising external risks from a widening current-account deficit.

In a report released on Wednesday, Fitch Ratings said, “Ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-‘ rating, which we affirmed in May 2021 with a stable outlook.”

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Fitch said that increases in global energy prices and a strong domestic recovery from the initial Covid-19 pandemic shock 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 our previous forecast of 2.2%. The State Bank of Pakistan (SBP) on 19 November 2021 raised its policy rate by a significant 150bp to 8.75%, pointing to rising risks related to the balance of payments and inflation, said the report.

“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,” Fitch said.

The ratings agency added, “Official reserve assets nearly doubled to $24.1 billion by end-September 2021 from $12.6 billion two years ago. However, liquid foreign-exchange reserves have dropped since mid-September, which we believe may partly reflect debt repayment.”

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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 programme. Pakistan aims to tap debt markets more regularly through the scheme, which could reduce the costs of coming to market. The authorities also plan new Sukuk issuance in 2021.

According to Fitch, “Following a staff-level agreement on the sixth review of the country’s Extended Fund Facility (EFF) reached on 21 November, we expect the IMF to release a further $1 billion in funding, provided certain prior actions are met. We believe these include amending the SBP Act to formalise the central bank’s institutional independence and removing some tax exemptions.”

The authorities’ sustained reform efforts and commitment to the IMF programme should support access to external financing, even with global financing conditions potentially becoming more challenging for emerging markets in 2022 as global monetary policy settings grow less accommodative, said the report.

“If the government retains its commitment to a market-driven exchange rate, we believe this would be a useful shock absorber to help contain external risks in the longer term,” said the report.

An exchange rate that supports the price competitiveness of Pakistan’s exports could over time help reduce the country’s reliance on debt financing to balance its external accounts, which remains a credit weakness. In addition, fiscal consolidation under the EFF could help reduce external imbalances by dampening imports, while also reducing the drag of weak public finances on Pakistan’s rating, said Fitch.

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