HONG KONG: Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC’.
Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.
Key Rating Drivers
Easing External Funding Risks:
The upgrade reflects greater certainty over continued availability of external funding, in the context of Pakistan’s staff-level agreement (SLA) with the International Monetary Fund (IMF) on a new 37-month US$ 7 billion Extended Fund Facility (EFF). Strong performance on the previous, more temporary IMF arrangement helped the country narrow fiscal deficits and rebuild foreign exchange (FX) reserves, and further improvements are likely. Nevertheless, Pakistan’s large funding needs leave it vulnerable if it fails to implement challenging reforms, which could undermine programme performance and funding.
New IMF Programme:
Pakistan and the IMF reached the SLA on July 12. Before IMF Board approval, which we assume by end-August, the government will have to obtain new funding assurances from bilateral partners, chiefly Saudi Arabia, the UAE and China, totalling about US$ 4 billion-5 billion over the duration of the EFF. We believe this will be achievable, given the strong past record of support and significant policy measures in the recent budget for the fiscal year ending June 2025 (FY25).
Ambitious Reforms:
The government aims under the new EFF to tackle longstanding structural weaknesses in Pakistan’s tax system, energy sector and state-owned enterprises, alongside a commitment to exchange rate flexibility and improvements in the monetary policy framework. It targets a 3pp increase in tax revenues/GDP, from under 9% in FY24, including through higher taxes on the country’s influential agricultural sector, which will have to be legislated at the provincial level.
Strong Recent Policy Record:
Pakistan successfully completed its nine-month Stand-by Arrangement with the IMF in April. Over the past year, the government raised taxes, cut spending and raised electricity, gas and petrol prices. The government also all but eliminated the gap between the interbank and parallel market exchange rates through a crackdown on the black market and regulation of exchange houses.
Narrower External Deficit:
We forecast the current account deficit (CAD) to stay relatively contained at about US$ 4 billion (about 1% of GDP) in FY25, after about US$ 700 million in FY24, given tight financing conditions and subdued domestic demand. Contractionary economic and fiscal policies, lower commodity prices and rupee depreciation have driven the sharp narrowing of the CAD from over US$ 17 billion in FY22. FX shortages have eased with the return of remittances to the official banking system, reversing their decline in 2H22.
Funding Needs Still Large:
Besides CADs, the authorities face over US$ 22 billion in external public debt maturities in FY25. Of the total maturities, US$ 13 billion is in the form bilateral deposits and loans that are regularly rolled over, including nearly US$ 4 billion in liabilities of the State Bank of Pakistan (SBP). Maturing debt also includes nearly US$ 4 billion from Chinese commercial banks, and US$ 4 billion from multilateral creditors. Pakistan’s next international bond maturity is in September 2025.
The government says it has identified over US$ 24 billion in gross external financing, mostly from bilateral and multilateral sources, not including potential bond issuance or the renewal of the oil facility with Saudi Arabia, but including a potential Panda bond issuance. FDI and non-resident portfolio inflows and climate-related finance pose other upsides to the funding plan.
Reserves Have Recovered; Still Low:
The SBP is rebuilding FX reserves amid inflows of new funding and limited CADs. We estimate official gross reserves, including gold, rose to over US$ 15 billion at June 2024 (about three months of imports), from nearly US$ 10 billion at end-June 2023, and we expect them to rise to nearly US$ 22 billion by FYE26, close their 2021 peak.
The SBP’s narrower measure of net liquid FX reserves (excluding gold and FX reserve deposits of banks) recovered to over US$ 9 billion at June 2024. The SBP has reduced its forward liabilities to local banks and is approaching a balanced net foreign asset/liability position.
Fiscal Consolidation:
Half of the revenue effort under the EFF is frontloaded in the FY25 budget, which was prepared together with IMF staff and projects a headline deficit of 5.9% of GDP and a 2.0% primary surplus (FY24 estimate: 7.4% and 0.4%, respectively). Our forecasts assume partial implementation of this and project a primary surplus of 0.8% of GDP and an overall fiscal deficit of 6.9% of GDP in FY25, improving to 1.3% of GDP and 6% of GDP, respectively, in FY26. Besides tax measures, the budget assumes a doubling of SBP dividends to 2% of GDP, and a doubling of provincial surpluses to 1% of GDP.
 to 'CCC+' from 'CCC'.){kind=link}