S&P reaffirms Pakistan’s credit rating, stable outlook

KARACHI: Standard and Poor's on Monday affirmed its rating on Pakistan's long- and short-term sovereign credit at B- and B respectively and retained its stable outlook on the economy.

It also affirmed 'B-' long-term issue rating on Pakistan's senior unsecured debt and sukuk trust certificates. S&P said Pakistan's economy is gradually recovering from its pre-pandemic nadir and the subsequent Covid-19 shock.

Ongoing reform efforts will support a continued stabilization of Pakistan's fiscal and external metrics, though vulnerabilities remain elevated, the rating agency said. The agency said stable outlook reflects expectations that funding from key bilateral and multilateral partners, along with the recent improvement in Pakistan's balance-of-payments position, will be sufficient for the country to meet its considerable external obligations over the next 12 months.

"Multilateral and official funding will remain critical to Pakistan's external debt sustainability." It added that the ratings on Pakistan reflect its nascent economic recovery amid the enduring risk of the Covid-19 pandemic, stable but considerable external indebtedness and liquidity needs, and an elevated general government fiscal deficit and debt stock. "We expect Pakistan's recent improvement in growth momentum to endure, bringing its long-term performance more in line with global peers." S&P said the government has adopted key reforms to stabilize its vulnerable fiscal position, however pandemic risks and political realities may temper further progress.

Following a pause at the outset of the pandemic in 2020, Pakistan has made further progress toward implementing economic and fiscal reforms under its Extended Fund Facility (EFF) program with the IMF, the agency said.

S&P said the ratings on Pakistan remain constrained by a narrow tax base and domestic and external security risks, which are elevated. Although the country's security situation has gradually improved over recent years, ongoing vulnerabilities weaken the government's effectiveness and weigh on the business climate.

"The humanitarian and security crisis in neighboring Afghanistan could pose additional risks to Pakistan's domestic security situation in the years ahead." S&P said domestic security, occasional tensions with India, and Pakistan's extended land border with neighboring Afghanistan pose challenges to Pakistan's long-term economic outlook. "These conditions, along with a shortfall in physical infrastructure, are additional bottlenecks to foreign direct investment."

The agency said rising revenues will help to gradually moderate the government's elevated interest burden. The Pakistan government has taken steps to bolster its revenue profile in line with the IMF's EFF reform program.

"Nevertheless, the government introduced limited new revenue generation measures in this year's budget, and additional reforms to tariff and tax regimes may be necessary in order to maintain EFF program momentum."

A comprehensive streamlining of tax exemptions and higher petroleum levies, alongside more robust administration efforts, has helped to boost the government's revenue performance. Additional reforms to Pakistan's personal income tax and a harmonization of the taxation of goods and services under the goods and services tax would help to further solidify revenue performance over the next few years.

"We expect Pakistan's current account deficit to rise as oil prices increase and import demand recovers from fiscal 2022 onward. Nevertheless, we do not see the deficit rising toward its 2018 level, and instead forecast that it will remain modestly below 3 percent of GDP."