ISLAMABAD: The international credit rating agency Fitch on Tuesday lowered Pakistan’s long-term foreign currency issuer default rating (IDR) from “CCC+” to “CCC-” due to significant refinancing concerns.
The rating agency said in a statement that the downgrading reflected a further severe worsening in external liquidity and funding conditions as well as the drop in foreign currency reserves to dangerously low levels.
“While we expect the ninth review of Pakistan’s IMF (International Monetary Fund) programme to be successful, the downgrade also highlights significant risks to programme performance and funding, notably in the lead-up to this year’s elections. In our opinion, the risk of default or debt restructuring is growing.
When compared to a peak of more than $20 billion at the end of August 2021, Fitch noted that the foreign exchange reserves were only approximately $2.9 billion on February 3 or less than three weeks’ worth of imports.
“Falling reserves reflect high, albeit falling, current account deficits (CADs), external debt servicing, and earlier FX intervention by the central bank, particularly in 4Q22, when an apparent informal exchange-rate cap was in effect,” the report continued.
The statement continued, “We expect reserves to remain at low levels, albeit we do foresee a minor recovery during the remainder of FY23, due to projected inflows and the recently lifted exchange rate cap.”
A difficult political environment, stringent IMF requirements, and funding requirements for the IMF programme were all cited by the rating agency as contributing reasons for the rating lowering.
The ninth review of Pakistan’s IMF programme, which was initially scheduled for November 2022, has been delayed, according to Fitch, due to issues with revenue collection, energy subsidies, and policies that are incompatible with a market-determined currency rate.
According to the agency, Pakistan’s longtime allies, including China, Saudi Arabia, and the United Arab Emirates, have expressed hesitation to provide financial support because there isn’t an IMF programme in place, which is “also crucial for additional multilateral and bilateral funding.”
The agency does, however, note that Pakistan will be able to access funds after a successful review. During the fiscal year, Pakistan is expected to receive $3.5 billion from other multilateral.
The next fiscal year’s external public-debt maturities are expected to remain high, according to Fitch.