Fitch Upgrades Pakistan’s Long-Term Sovereign RatingFitch Upgrades Pakistan’s Long-Term Sovereign Rating Fitch Ratings has upgraded Pakistan’s long-term foreign exchange issuer (IDR) rating to “CCC+” from “CCC,” citing an improvement in the country’s external repayment capacity. The upgrade reflects greater certainty about continued external financing, particularly with Pakistan’s staff-level agreement with the International Monetary Fund (IMF) for a new Extended Fund Facility (EFF). Pakistan faces significant external debt repayment obligations, with over $22 billion maturing in fiscal year 2024-25. The government has identified over $24 billion in external financing, including from bilateral and multilateral sources, to meet these obligations. The State Bank of Pakistan (SBP) has been rebuilding foreign exchange reserves, which have risen to over $15 billion as of June 2024. The SBP’s net liquid foreign exchange reserves have also recovered to over $9 billion. Fitch notes that Pakistan’s large financing needs make it vulnerable to program implementation challenges. The government must secure financing guarantees from bilateral partners, such as Saudi Arabia, the UAE, and China, to secure the EFF. The new EFF aims to address structural weaknesses in Pakistan’s tax system, energy sector, and state-owned enterprises. The government plans to increase tax revenues and improve energy sector performance. Pakistan has made progress in reducing its budget deficit and rebuilding foreign exchange reserves under its previous IMF program. The successful conclusion of that program has paved the way for the new EFF. Despite the upgrade, Fitch cautions that Pakistan’s external debt remains a significant risk factor, particularly if program implementation fails.
Rating upgraded to ‘CCC+’ due to improved external debt repayment capacity
Our correspondent |
July 30, 2024
KARACHI:
Fitch Ratings has upgraded Pakistan’s long-term foreign exchange issuer (IDR) rating to “CCC+” from “CCC”, reflecting an improvement in the country’s external repayment capacity ahead of the International Monetary Fund’s (IMF) board meeting to approve a $7 billion Extended Fund Facility (EFF).
The global rating agency has upgraded the rating for the second time in the past 12 months. Prior to that, it downgraded Pakistan to “CCC-” in February 2023. In its commentary, Fitch said that “the upgrade reflects greater certainty about the continued availability of external financing, in the context of Pakistan’s staff-level agreement (SLA) with the IMF on a new 37-month $7 billion Extended Fund Facility.”
Over $22 billion of external government debt is maturing in fiscal year 2024-25. Of the total, $13 billion is in the form of deposits and loans that are regularly rolled over, including nearly $4 billion of obligations of the State Bank of Pakistan (SBP). The maturing debt also includes about $4 billion provided by Chinese commercial banks and $4 billion from multilateral creditors. Pakistan’s next international bonds are due in September 2025.
“The government says it has identified over $24 billion in gross external financing, mainly from bilateral and multilateral sources, excluding possible bond issuance or the extension of the oil facility with Saudi Arabia, but including a possible Panda bond issuance. FDI (foreign direct investment) and non-resident portfolio inflows and climate-related financing are other benefits to the financing plan,” Fitch said. It noted that the SBP was rebuilding foreign exchange reserves amid new financing inflows and a contained current account (CAD) deficit.
“We estimate gross official reserves, including gold, to have risen to over $15 billion (about three months of import cover) by June 2024, from almost $10 billion at the end of June 2023, and we expect them to rise to almost $22 billion by the end of FY26, close to their 2021 peak.”
The SBP’s narrower measure of net liquid foreign exchange reserves (excluding gold and banks’ foreign exchange reserves) recovered to over $9 billion in June 2024. The SBP has reduced its term liabilities to local banks and is approaching a balanced net foreign assets/liabilities position.
The good performance of the previous IMF program of $3 billion for the short term of nine months has helped the country to reduce the budget deficit and rebuild foreign exchange reserves. Further improvements are likely.
“However, Pakistan’s large financing needs leave it vulnerable if it fails to implement challenging reforms, which could undermine program performance and financing,” Fitch said.
It added that Pakistan and the IMF reached an SLA on July 12, 2024. Before the IMF board approves it, which is expected to happen by the end of August, the government will have to secure new financing guarantees from bilateral partners, mainly Saudi Arabia, the UAE and China, totaling around $4-5 billion over the life of the EFF.
“We believe this will be achievable given the strong track record of support and the important policy actions in the recent budget for the fiscal year ending June 2025.”
With the new EFF, the government aims to address long-standing structural weaknesses in the tax system, energy sector and state-owned enterprises. In addition, the government seeks exchange rate flexibility and improvements in the monetary policy framework.
The aim is to increase tax revenues/GDP by three percentage points, from less than 9% in FY24. This will be done, among other things, through higher taxes on the influential agricultural sector. These taxes should be set at the provincial level.
Pakistan successfully concluded its nine-month stand-by arrangement with the IMF in April. Over the past year, the government has raised taxes, cut spending and increased prices for electricity, gas and petrol.
The government has also virtually closed the gap between interbank and parallel (open) market exchange rates by cracking down on the black market and regulating currency exchange offices.
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