Ratings by Fitch: Pakistan’s political instability exacerbates the danger of foreign financing
There were no major problems during Pakistan’s recent government change. It adds to short-term policy uncertainty because of rising commodity prices and a rise in global risk aversion, Fitch Ratings said Tuesday in a research report.
Pakistan’s ability to pay off its foreign debt in the short term, as well as our assessment of the country’s credit rating, which we kept at “B-“/Stable in February 2022, is still up to the country’s government.
In the face of growing prices, the departing administration lost popular support and coalition partners. Imran Khan, Pakistan’s former prime minister, first wanted to avert a no-confidence vote against his administration. However, in our view, his acceptance of the Supreme Court’s decision to go forward and the outcome of the vote strengthens the credibility of constitutional procedures.
Additionally, the paper said that the recent oil price shock would exacerbate the current-account deficit, compounding the already high gross external finance requirements resulting from an extended debt repayment schedule. We now think the current-account deficit for the fiscal year ending in June 2022 (FY22) will be about 5% of GDP (about $18.5 billion), up from 4% in our February report.
“We expect this to fall to around 4% in FY23 as oil prices fall,” it said.
Pakistan is expected to repay $20 billion in foreign debt in FY23, albeit this figure includes $7 billion in Chinese and Saudi deposits that we anticipate will be rolled over. Increased trade deficits and capital outflows have pushed the Pakistani rupee sharply lower against the US dollar. This, together with loan repayments, has placed downward pressure on the State Bank of Pakistan’s (SBP) liquid foreign-exchange reserves, which decreased by $5.1 billion to $11.3 billion between February 28 and April 1, 2022.
Paper says that China is set to extend a loan of $2.4 billion, which is part of the reason for the drop in prices.
The previous government’s measures in accordance with an IMF programme aided in establishing its access to global loan markets. Pakistan demonstrated this by issuing a $1 billion Sukuk in January 2022. Since then, external factors such as increasing US interest rates and increased investor risk aversion due to the Ukraine war have harmed the country’s access to private creditor funding. We expect that failures in reform or the IMF programme would exacerbate access difficulties.
The change in administration may affect the process of completing the remaining three IMF programme evaluations on schedule. Senior officials from the new government’s main parties say they want to keep in touch with the IMF.
However, talks over critical revenue-raising changes may remain protracted, especially given the government’s wide coalition of divergent political groups. New fuel subsidies announced in March to combat inflation have already complicated programme discussions and medium-term budget reduction, as have approaching elections, which are still scheduled for mid-2023.
We think that if there is less policy uncertainty and commodity prices don’t go far above our expectations for 2022–2023, we think that Pakistan can handle its external cash situation in the short term. We anticipate that its access to bilateral funding, notably from China, will remain solid. The strong relationship between the two countries isn’t likely to be damaged by Pakistan’s new leader.
The change in government will provide insight into the institutionalisation of recent changes, including the SBP’s independence and a more market-determined currency rate.
“We would consider a reversal of reform momentum as a negative for credit. In the longer run, if the authorities are unable to undertake fiscal reform, we anticipate Pakistan’s access to market funding will remain limited, “the research concluded.
