Fitch downgrades Pakistan's long term foreign currency IDR

February 15, 2023 (MLN): Fitch Ratings on Tuesday downgraded Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC-', from 'CCC+'.

It is pertinent to note that the rating agency did not assign an outlook to cash-strapped Pakistan because it typically does not assign outlooks to ratings of ‘CCC+’ or below.

The downgrade reflects further sharp deterioration in external liquidity and the decline of foreign exchange (FX) reserves to critically low levels.

On the IMF front, Fitch stated in a report, "While we assume a successful conclusion of the 9th review of Pakistan’s International Monetary Fund (IMF) program, the downgrade also reflects large risks to continued program performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility, in our view."

“Liquid net forex reserves of the State Bank of Pakistan were about $2.9 billion on 3 February 2023, or less than three weeks of imports, down from a peak of more than $20 billion at end-August 2021,” it noted.

Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing, and earlier forex intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place.

It further stated, "Of the $7 billion remaining for FY23, $3 billion represent deposits from China (SAFE) that are likely to be rolled over and $1.7 billion are loans from Chinese commercial banks which we assume will be refinanced in the near future.”

“As such, we forecast a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 after $17 billion (4.6% of GDP) in FY22. The narrowing of the CAD has been driven by restrictions on imports and forex availability, as well as by fiscal tightening, higher interest rates, and measures to limit energy consumption,” Fitch said in a statement.

The SAFE deposits are scheduled to mature in two installments ie $2 billion in March and $1 billion in June, it highlighted. 

“We understand that completion of the review hinges on additional front-loaded revenue measures and increases to regulated electricity and fuel prices,” it said.

Pakistan is currently facing one of the most severe economic crises in its history, with its foreign exchange reserves reaching dangerously low levels.

In the midst of this crisis, traditional allies such as China, Saudi Arabia, and the United Arab Emirates have been hesitant to provide further aid without the implementation of an IMF program, which is also essential for securing additional multilateral and bilateral funding.

Although Pakistan's currency has since stabilized, it experienced a significant depreciation earlier this year, hitting record lows.

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