Fitch downgrades Pakistan’s rating, warns of ‘real possibility’ of default

Islamabad:

New York-based global ratings agency Fitch said on Tuesday that the beleaguered Pakistani economy faces substantial credit risks with “severely low levels” of foreign exchange reserves, warning that default is a “real possibility”. . Fitch downgraded Pakistan’s long-term foreign currency issuer default rating (IDR) to ‘CCC-‘ from ‘CCC+’ on further deterioration in liquidity and policy risks.

Fitch said the downgrade reflected a sharp deterioration in external liquidity and funding conditions, as well as a decline in foreign exchange (FX) reserves to “severely low levels”.

“Falling reserves reflect the large-scale drawdown current account deficit (CAD), external debt servicing and earlier FX intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appeared.

“We expect reserves to remain at low levels, although we anticipate a modest recovery during the remainder of FY2023 due to anticipated inflows and the recent removal of the exchange rate cap,” the agency said.

Fitch said it expected Pakistan to successfully complete the ninth review of the International Monetary Fund (IMF) programme, and the downgrade was a reflection of larger risks to the program’s performance and funding ahead of this year’s elections.

“In our view, default or debt restructuring remains a real possibility,” Fitch warned.

Pakistan has been grappling with instability stemming from an economic crisis, last summer’s devastating floods and a recent increase in terrorist attacks across the country.

A crucial USD 1.2 billion of the 2019 bailout had been withheld since December last year, after the IMF urged Pakistan to raise more cash.

Pakistan held ten days of intense talks with the IMF delegation in Islamabad, but could not reach an agreement.

Fitch highlighted a challenging political context and contingency funding on the IMF program as other factors for the rating downgrade.

The IMF and the Pakistan government resumed talks virtually on Monday, with Islamabad hopeful that an agreement would soon be reached that would give a boost to the country’s ailing economy.

Pakistan’s foreign exchange reserves stood at around US$2.9 billion as of February 3, less than three weeks’ worth of imports, according to estimates by the country’s central bank. This was down from a peak of over USD 20 billion at the end of August 2021.

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