The reputed international credit rating agency Fitch has sounded a note of warning about Pakistan’s economy. Fitch’s latest Pakistan Country Risk Report paints a picture of gloom amidst the ongoing political turmoil which it says could derail the country’s economic recovery. It has highlighted several internal and external risk factors that could impact the ongoing efforts of Pakistan’s current coalition administration.

The Fitch report refers to the International Monetary Fund (IMF) which has projected that Pakistan’s economy will grow by 3.5% in the fiscal year 2024-25. This projection falls slightly below the Pakistani government’s target of 3.6%, which was announced in the latest budget. According to Pakistan’s economic survey, the country’s GDP grew by only 2.4% in the fiscal year 2023-24, failing to meet the 3.5% target set by the government.

According to Fitch, economic growth in the country will accelerate from 2.4 per cent in FY24 to 3.2pc in FY25, supported by monetary easing, improved agricultural output and slowing inflation. The report has cited three reasons for an optimistic view about growth in 2024-25: “We expect that the vital agriculture sector will continue to recover. The proximate cause of Pakistan’s economic crisis in 2023-24 was a devastating flood, which disrupted agricultural activity. Second, we think that inflation will ease sharply, slipping from 11.8pc year-on-year in May 2024 to just 6.2pc in Dec 2024. We also expect that the big falls in Pakistan’s currency are now behind us, and that a broadly stable exchange rate will reduce inflationary pressures. We expect that the key policy rate will be cut from 20.5pc in June 2024 to 16pc by Dec 2024 and to 14pc by Dec 2025.”

However, Fitch has added that risks to its forecast are weighted heavily to the downside. Pakistan’s economy remains very fragile in the face of internal mismanagement and external shocks and the authorities have very limited fiscal buffers. According to the report, the World Bank’s latest “crisis preparedness gap analysis” rated the country as ‘basic’ or below on all five of its key metrics.

Fitch has also pointed to another risk which could be caused by a jump in oil prices or lower-than-expected grain production. The rating agency expects that the rupee will only weaken a little bit over the remainder of 2024, slipping from 278 rupees to the dollar to 290. However, risks remain weighted heavily towards a larger rather than a smaller depreciation.

The Fitch report has expressed the hope that easing inflation would provide the State Bank of Pakistan (SBP) with the space to cut its key policy rate from 22pc to 16pc: “We expect that policymakers at SBP will continue to loosen policy over the longer term, to 14pc by end of 2025. We expect that policymakers will miss their ambitious budget targets, but we still expect that the deficit will slip from 7.4pc in 2023-24 to 6.7pc of GDP in 2024-25.”

The slightly wider overall current account deficit will be due to a larger trade deficit, which will widen from 7.5pc of GDP in 2023-2024 to 7.7pc in 2024-2025. The prognosis is that Pakistan’s current account deficit will be smaller than the IMF’s expectations, but will widen a little bit compared to the previous year, from 0.8pc of GDP in 2023-2024 to one pc in 2024-2025. Also, Pakistan will face difficulty in financing the current account deficit in the coming years. Additionally, the rating agency has warned that another potential flood or natural disaster could pose a significant threat to the already fragile economy.

There is a strong political angle to the Fitch report. It has predicted that the current government would remain in power over the coming 18 months and succeed in pushing through with the fiscal reforms recommended by the International Monetary Fund: “In the unlikely event that the government is replaced,” it has opined, “the most likely alternative is a military-backed technocratic administration rather than fresh elections.”  The report underscores the fragile political climate, pointing out that Pakistan Tehreek-e-Insaaf (PTI) founder Imran Khan is likely to remain imprisoned despite several successful legal appeals.

To quote the Fitch report, “The country’s fragile political situation could … derail the recovery. While Pakistan’s establishment parties were successful in creating a new coalition government following the February election, the strong electoral performance of independent candidates backed by jailed opposition leader Imran Khan suggests that there is significant dissatisfaction with the current political elite. Another round of protests in urban areas could disrupt economic activity.”

The Fitch report contains much food for thought for the country’s political leadership. This is not a time for political parties to keep fighting over crumbs of power while the economy is in a free fall. This is a time to bury their differences and agree on collective action to rescue the economy in the larger national interest.