Economic stability reaffirmed

After Moodys raised Pakistan’s economic outlook to stable last month, another top rating credit agency Fitch has reaffirmed the country’s long-term rating with a stable outlook. The improvements in Pakistan’s economy have now been realized by two of the top credit rating agencies in the world.

According to Fitch, the B- rating reflects a challenging position for Pakistan characterised by high financing requirements and low reserves, coupled with weak public finances, large fiscal deficits, high debt-to-GDP ratio and weak governance indicators. The agency stated that progress has been made toward strengthening finances and positive steps have been made although credible risks remain.

Prime Minister Imran Khan has declared 2020 as the year of prosperity and job creation, while terming the previous year as one of stability. Fitch has reaffirmed the government’s efforts to reduce economic vulnerabilities over the past year due to its stringent policies and the IMF programme. This will bolster the government’s claims that the economy is heading in the right direction.

The latest forecast by Fitch over the narrowing of the current account deficit will embolden claims by Finance Adviser Hafeez Shaikh who has been leading the economic recovery. Fitch expects the deficit to reduce further to 2.1 percent of the GDP by the end of the current fiscal year. It also expects foreign reserves to rise to $11.5 billion, while exports are forecast to grow modestly.

The government allowed the currency exchange rate to be determined by market forces which lead to a depreciation of the rupee and tighter monetary conditions. Fitch has appreciated this move as it may help rebuild foreign exchange reserves and improve resilience. The upward growth is being facilitated by the government not relying on public borrowing and on external sources.

Fitch now expects the external financing requirement will remain high in the mid $20 billion range. This will be worsened by debt repayment and so these financing requirements could be challenging in the long run. The government should look beyond the horizon to focus on risks in the future rather than the immediate ones, or else we might be looking at another bailout.

Pakistan’s rating is constrained by structural weaknesses and governance indicators, but the report is a reassurance to the government that its efforts are fruitful.