NationalVOLUME 15 ISSUE # 12

Missed targets

Fitch Ratings has kept Pakistan’s credit rating unchanged at B negative for the second successive time, which reflects a challenging external position characterised by a high external financing requirement, low reserves, weak public finances, including large fiscal deficits and a high government debt-to-GDP ratio, and weak governance indicators.

It forecast Pakistan will miss all economic targets this year. The rating shows Pakistan still languishes at the bottom and has a long way to go to obtain financial stability despite claims by the government that the country’s economic indicators are improving. It is worrying that one of the top three global rating agencies has kept Pakistan’s credit rating unchanged over its challenging external sector situation and weak fiscal and debt position. However, it said that steps have been taken towards addressing the issues and the implementation of the International Monetary Fund (IMF) programme is on track. It affirmed Pakistan’s rating with a stable outlook while Pakistani authorities expect an improvement due to steps taken in the last year. “The ‘B-’ rating reflects a challenging external position characterised by a high external financing requirement and low reserves, weak public finances including large fiscal deficits and a high government debt-to-GDP ratio, and weak governance indicators,” according to the rating agency.

It says Pakistan will miss all economic targets, including the annual economic growth rate target of 4pc, budget deficit target of 7.2pc and Rs5.5 trillion tax collection target. Fitch said that IMF’s Extended Fund Facility programme was on track, however, “Implementation risks remain high, particularly given the politically challenging nature of the authorities’ reform agenda. Gross external financing needs are likely to remain high, in the mid-$20 billion range, over the medium-term due to considerable debt repayments and despite the smaller current account deficit.” It noted that sustaining inflows to meet the financing needs could prove challenging over a longer horizon without stronger export growth and net FDI inflows.

Pakistan’s general government debt rose to 84.8pc of GDP, well above the current ‘B’ median of 54pc, due to the currency depreciation, higher fiscal deficit, and build-up of liquidity buffers. Pakistan’s debt to revenue ratio also jumped sharply to 667pc, compared with the historic ‘B’ median of 252pc. Pakistan’s rating is constrained by structural weaknesses, reflected in weak development and governance indicators. Fitch said that governance quality was also low in Pakistan with a World Bank governance indicator score in the 22nd percentile while the ‘B’ median is in the 38th percentile. However, it acknowledged that Pakistan had made progress to address the issues. The external vulnerabilities have been reduced over the past year. Still the external finances remain fragile with relatively low foreign exchange reserves in the context of an elevated external debt repayment schedule and subdued export performance.

Fitch forecast a further narrowing of the current account deficit to 2.1pc of GDP in the year ending June 2020 and 1.9pc in FY21, from 4.9pc in the last fiscal year. But the improvement came on back of import compression, as exports are forecast to grow modestly from a low base. Pakistan’s gross liquid foreign exchange reserves are expected to rise around $11.5 billion by end of this fiscal year from $7.2 billion in June last year.  The government is consolidating public finances, but progress will be challenging due to the relatively high reliance on revenues to achieve the planned adjustment. Fitch believes the revenue target in the fiscal year 2019-20 budget is ambitious. Nevertheless, the government’s efforts to broaden the tax base through its tax-filer documentation drive and removal of GST exemptions will contribute to stronger revenue growth in the current fiscal year,” it noted.

Pakistan’s fiscal deficit is expected to decline to 7.9pc of GDP or close to Rs4 trillion in this fiscal year. The government has budgeted Rs3.16 trillion or 7.2pc of GDP budget deficit and Fitch has predicted nearly Rs900 billion slippage, which is massive and contrary to the government’s claim of fiscal consolidation. Expenditure is expected to rise particularly as interest-servicing costs increase sharply on the back of higher interest rates. Pakistan’s interest payments as percentage of the general government revenues will be 45pc in this fiscal year, well above the historic peer median of 8.6pc. The general government debt-to-GDP will fall to about 80pc by end-FY21 due to faster nominal GDP growth and fiscal consolidation. The government still has roughly 17pc of GDP in upcoming domestic maturities in FY20 compared with the ‘B’ median of 6pc, but has built up its cash buffer to partly mitigate rollover risk. Tighter macroeconomic policies are further slowing GDP growth, which Fitch forecasts at 2.8pc in FY20 from 3.3pc in FY19. Inflation has also continued to rise sharply from the cost pass-through of the currency depreciation and increases in energy tariffs. Inflation is forecast to average 11.3pc in FY20 compared with 6.8pc in FY19.

Despite many negatives, the report offers hope as the fiscal deficit is expected to decline to 7.9pc of GDP or close to Rs4 trillion in this fiscal year. The general government debt-to-GDP is forecast to fall to about 80pc by end-FY21 due to faster nominal GDP growth and fiscal consolidation. Pakistan’s gross liquid foreign exchange reserves are expected to rise around $11.5 billion by end of this fiscal year from $7.2 billion in June last year. The rating agency has acknowledged that Pakistan has made progress to address its issues. The external vulnerabilities have been reduced over the past year. The report indicates the rating agencies will improve Pakistan’s ranking in their next reports.

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