Fitch affirms Pakistan’s credit rating at B- with stable outlook

NEW YORK: International credit rating agency Fitch has affirmed Pakistan’s sovereign credit rating at B- with a stable outlook.

In a press release issued on Monday, the agency took note of progress being made towards strengthening external finances and positive steps on the fiscal front but considerable risks remain.

It stated that the B- rating reflects a challenging external position characterised by a high external financing requirement and low reserves, weak public finances including large fiscal deficits and a high government debt-to-GDP ratio, and weak governance indicators.

It added that external vulnerabilities have been reduced over the past year as a result of policy actions and financing through the IMF programme, which have narrowed the current account deficit and supported a modest rebuilding of reserves.

Going forward, Fitch forecast further narrowing of the current account deficit to 2.1 percent of GDP in FY20 and 1.9 percent in FY21, from 4.9 percent in the last fiscal year. It stated that exports are forecast to grow modestly from a low base.

The rating agency has also appreciated the adoption of a flexible exchange rate by the State Bank of Pakistan.Fitch expects gross liquid foreign exchange reserves rise to around $11.5 billion by FY20, from $7.2 billion at FY19.

According to Fitch, with the reform agenda on track as evident from the successful review of the arrangement with the IMF, the government is consolidating public finances though stronger revenue growth, broadening of tax base and increased documentation of the economy.

The gross external financing needs are likely to remain high, in the mid- $20 billion range over the medium term due to considerable debt repayments and despite the smaller current account deficit.  It warned that sustaining inflows to meet these financing needs could prove challenging over a longer term without stronger export growth and net FDI inflows.

Fitch has also acknowledged improved fiscal discipline, ensured by the recently introduced Public Financial Management Act and the steps taken by the government to manage domestic debt risks following cessation of borrowing from the State Bank.

The agency stated that the government’s efforts to broaden the tax base through its tax-filer documentation drive and removal of GST exemptions will contribute to stronger revenue growth in the current fiscal year.

Fitch forecasts the fiscal deficit to decline to 7.9% of GDP in FY20. This is slightly higher than the government’s expectations of 7.5%. It also expects expenditure to rise particularly on the back of higher interest rates.

Tighter macroeconomic policies are further slowing GDP growth, which Fitch forecasts at 2.8% in FY20 from 3.3% in FY19. It expects growth to recover gradually to 3.4% by FY21. Inflation has also continued to rise sharply due to currency depreciation and increases in energy tariffs.