KARACHI:
International credit rating agency Fitch Ratings has expressed concern over Pakistan’s external payment situation and said the country’s rating could be downgraded if there are delays in reviews from the International Monetary Fund (IMF).
According to Fitch’s latest report, Pakistan has made progress in restoring economic stability, including a significant reduction in inflation and an improvement in foreign exchange reserves. The decision to reduce the policy rate to 12% in January and the plunge in inflation rate to 2.4% are signs of positive development.
In addition, strong remittances, increasing agricultural exports and tight fiscal policies have turned the current account deficit into a surplus.
However, the rating agency pointed out that Pakistan had to repay more than $22 billion in external debt in the current fiscal year, of which $13 billion comprised bilateral loans.
It said that external financing challenges and a potential delay in the IMF programme could exacerbate Pakistan’s fiscal difficulties, which was likely to have a negative impact on credit rating.
The report said that Pakistan had continued to make progress in restoring economic stability and consolidating reserves, adding that progress on difficult structural reforms was the key to IMF reviews and financial support from other multilateral and bilateral lenders.
The State Bank of Pakistan’s (SBP) decision to cut the policy rate to 12% on January 27 highlights recent progress in controlling the consumer price inflation. Inflation has been slightly above 2% per annum in January 2025, but was around 24% in FY24 (the fiscal year ending June 2024).
Main reasons for the rapid decline in inflation are subsidy reforms and a stable exchange rate. This progress has been possible due to a tight monetary policy, which has resulted in a reduction in domestic demand and external financing needs.
Economic activities, having weathered effects of the tight monetary policy, are now benefiting from stability and falling interest rates. Real growth is projected to be 3% in FY25 and credit to the private sector turned positive in real terms in October 2024, the first time since June 2022.
Strong remittances, improving agricultural exports and tight fiscal policy have led to a current account surplus of $1.2 billion (over 0.5% of gross domestic product – GDP) from a deficit in FY24. Foreign exchange market reforms, introduced in 2023, also contributed to this improvement.
At the time of assigning Pakistan a credit rating of “CCC+” in July 2024, Fitch had expected a modest increase in current account deficit in FY25.
Pakistan’s foreign exchange reserves are performing well in the backdrop of the IMF’s $7 billion Extended Fund Facility (EFF) and Fitch’s previous forecasts. Official reserves exceeded $18.3 billion by the end of December 2024, up from $15.5 billion in June, and are sufficient to cover nearly three months of external payments.
Pakistan is due to repay more than $22 billion in the external public debt in FY25. This includes about $13 billion in bilateral reserves. According to Fitch, bilateral partners will renew these reserves in line with commitments made to the IMF. Saudi Arabia rolled over $3 billion in December while the UAE rolled over $2 billion in January.
Fitch expects future bilateral financial flows to be largely on a commercial basis and subject to reforms. The government’s talks with a Saudi investor to sell shares in a gold and copper mine are an example of this trend. Pakistan and Saudi Arabia have also recently agreed on an oil facility based on deferred payments.
Fitch said that progress had been made in financial reforms, but some obstacles remained. Pakistan’s primary financial surplus target is better than the IMF’s target.
However, federal tax revenue in the first six months of FY25 was below the required rate, as per the IMF’s performance indicators. All provinces have recently passed laws to increase the tax on agricultural income, which was a key structural condition under the EFF, but due to delays, it could not be implemented by January 2025.
