Fitch maintains rating

18 December 2023

Published in: Business Recorder

Fitch has maintained Pakistan’s rating at CCC positive — a rating that has been stable since 10 July 2023 when it was raised from negative to positive CCC. The reason for the upgrade was the announcement of a staff-level agreement (SLA) on the 3 billion dollar nine-month-long Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) on 29 June, subsequent to all prior conditions having been met by the then Shehbaz Sharif-led government.

The CCC plus and CCC negative rating are defined as a country with substantial credit risk with default a real possibility and the reason cited by the rating agency is “high external funding risks”.

Assessment by Fitch is fully supported by the IMF in its SBA documents dated 30 June, which state that the “public debt is projected to decline very slowly over the projection horizon and will require robust continuation of prudent policies beyond the programme period (scheduled to end 12 April 2024). The margin of error for policy slippages and delays in urgently needed structural reforms remains very small.”

Fitch evaluated Pakistan’s ESG (environmental, social and governance) percentile rank below 50 for political stability and rights (citing shrinking of space for political expression), institutional and regulatory quality, human rights and political freedoms with a negative impact on the country’s credit profile, and noted that Pakistani administrations have a history of reversing or not adhering to reforms pledged to multilaterals, which explains the insistence of the Fund for “front loaded” implementation of conditions.

The budget for the current year, revised after the SLA was reached, envisages external loans of 6,874 billion rupees (23 to 24 billion dollars based on the prevailing exchange rate) with 1,305 billion rupees from commercial banks abroad and 435 billion rupees from issuing sukuk/Eurobonds (6.1 billion dollars as per the budgeted exchange rate of 284 rupees to the dollar) – 47.5 percent of the total budget outlay of 14,460 billion rupees and even more disturbingly 73 percent of the revised tax revenue target of 9,400 billion rupees.

This massive reliance on external funding is therefore critical to funding the budget in the current year in spite of the then Ishaq Dar-led finance ministry pledging to slash current expenditure by 80 billion rupees though no details were provided at the time or since. The usual practice in the past has been curtailment of the budgeted outlay on the federal Public Sector Development Programme (PSDP) and it is relevant to note that disbursement of the budgeted PSDP of 950 billion rupees has slowed down considerably due to severe financing constraints.

However, on 15 September the Caretaker finance minister announced an unbudgeted 80 billion rupee for incentivising remittance inflows through official channels and it is unclear if the government has disbursed more than the announced 20 billion rupees on 16 September or where this amount has or would be adjusted from.

The situation today, as publicly acknowledged by the caretaker finance minister, does not allow for the government to borrow at the exorbitant rates on offer in the external market – a rate that is dependent on the country’s poor ratings.

Interestingly though, Fitch echoes the sentiment prevailing in the country today notably: “We expect general elections to take place as scheduled in February, and to produce a coalition government along the lines of Shehbaz Sharif’s government.

Former prime minister Imran Khan’s Pakistan Tehreek-e-Insaf party likely remains popular, but its electoral prospects may be limited by Khan’s imprisonment and the departure of senior leaders. Space for political expression has shrunk since widespread unacceptable protests in May 2023.

Nevertheless, further delays to elections or renewed political volatility cannot be excluded and would jeopardize IMF negotiations and external funding.” This must surely bring it home to all stakeholders that a divorce in the marriage between politics and economics is simply not tenable at the present moment in time with the current deepening economic impasse.