Fitch Says Pakistani Government Shift Adds To Policy Uncertainty

In a statement, Fitch Ratings noted that the recent government transition in Pakistan has been “peaceful,” but that it adds near-term policy “uncertainty” because of rising commodity prices and a global risk aversion.

According to a recent report from the American credit rating agency, Pakistan’s capacity to renew its foreign debt depends on the government’s policy agenda and the agency’s evaluation of the rating.

When a no-confidence vote over the weekend was successful, Shehbaz Sharif became Pakistan’s 23rd prime minister.

Imran Khan’s final acceptance of the Supreme Court’s ruling that it should proceed and the outcome of the vote improves the credibility of constitutional procedures, Fitch Ratings stated in a press release.

With a wide range of political groups in the coalition administration, Fitch feared that major revenue-raising changes might take a long time to implement, which could hamper the completion of the remaining three assessments of the International Monetary Fund programme.

Pakistan’s current-account deficit is expected to rise because of the recent oil price shock, which is expected to add to Pakistan’s already high external funding requirements because of an increased debt-repayment schedule.

“Our prediction for the current-account deficit for the fiscal year ending June 2022 (FY22) is currently about 5% of GDP (roughly $18.5 billion), up from 4% in our February assessment. Oil prices are expected to fall to roughly 4% in FY23, which we expect to reduce.”

For the $7 billion in Chinese and Saudi deposits, Fitch predicts a rollover as well.

According to the report, the Pakistani rupee has depreciated sharply against the US dollar because of a rise in trade and capital outflows. Liquid foreign-exchange reserves held by the State Bank of Pakistan (SBP) were reduced to $11.3 billion, a loss of $5.1 billion between the end of February and April 1, 2022, because of this and debt repayments.

A $2.4 billion loan from China, which is due to be repaid, was cited as one factor in the fall.

Fitch stated that Pakistan’s successful issuance of a $1 billion Sukuk in January 2022 was because of the previous government’s adoption of reforms under an IMF programme.

External reasons, such as rising US interest rates and increased investor risk aversion because of the Ukraine war, have hampered Pakistan’s access to private creditor borrowing since then, according to the report.

Failures in reform or the IMF programme, according to Fitch, “would make access much more difficult.”

Foreign currency reserves can be maintained in Pakistan’s short-term if policy uncertainty is promptly resolved and commodity prices do not rise significantly over our predictions for 2022-2023.

A solid bilateral relationship between China and the United States means that “we expect its access to bilateral finance to remain robust, notably from China,” it stated.

The new government will put previous changes including the SBP’s independence and a more market-determined currency rate to test, according to Fitch.

“We would consider any slack in reform momentum to be a credit negative. The rating agency expects Pakistan’s access to market credit to remain restricted in the long term if the government cannot achieve budget reform.”