Fitch sees Pakistan’s current account deficit widening in fiscal 2022 on policy uncertainty

KARACHI: Fitch Ratings on Tuesday revised its projection for Pakistan’s current account deficit to 5.0 percent of the gross domestic product for the current 2022 fiscal year on near-term policy uncertainty and external risks through the country witnessed a peaceful change in government.

“The authorities’ policy agenda remains central to Pakistan’s ability to refinance its external debt over the medium-term, as well as our assessment of the rating, which we affirmed at B-/Stable in February 2022,” Fitch said.

The agency said the recent oil shock would push up the current account deficit and add to the already high gross external financing needs from an elevated debt-repayment schedule.

“We now forecast a current account deficit of around five percent of GDP (around $18.5 billion) for the fiscal year ending June 2022 (FY22), up from four percent in our February review. We expect this to moderate to around four percent in FY23, as oil prices ease.”

Pakistan faces $20 billion in external debt repayments in FY23, though this includes $7 billion in Chinese and Saudi deposits. However, the agency expects these to be rolled over.

Rupee depreciation on the back of higher trade deficits and capital outflows, along with debt repayments, has put pressure on liquid foreign-exchange reserves with the State Bank of Pakistan (SBP), which fell by $5.1 billion between end-February and April 1, 2022, to $11.3 billion.

“We believe the decline also partly reflects repayment of a $2.4 billion loan from China that is slated to be renewed,” Fitch said.

Setbacks to the reforms made in line with the International Monetary Fund (IMF) programme or holdups in the programme itself could make Pakistan’s access to the global debt markets more difficult, the ratings agency said.

The previous government’s implementation of reforms in line with an IMF programme helped in accessing global debt markets, which was highlighted by the issuance of a $1 billion sukuk in January 2022.

Since then, the country’s access to private creditor finance has been challenged by external factors, such as rising US interest rates and heightened investor risk aversion around the Ukraine conflict.

“We believe setbacks to reform or the IMF programme would make access even more difficult,” it noted.

It believes that the change in government may complicate timely completion of the remaining three reviews of the IMF programme.

Senior officials from key parties in the new government have signalled that they plan to maintain engagement with the IMF.

However, negotiations around key revenue-raising reforms could prove lengthy, particularly as the government was a broad coalition of disparate political parties. New fuel subsidies introduced in March as part of efforts to restrain inflation have already added to the complications facing programme negotiations and medium-term fiscal consolidation, as have upcoming elections, which were still due by mid-2023. Fitch believed that Pakistan has the ability to manage its external liquidity position in the near-term if policy uncertainty was resolved relatively quickly and commodity prices did not rise substantially above their forecasts for 2022-2023.

“We expect its (Pakistan’s) access to bilateral financing to remain robust, particularly from China. The two countries’ strong bilateral relationship is unlikely to be significantly weakened by Pakistan’s change in leadership,” it said.

The change in government would test how institutionalised recent reforms, such as the independence of the State Bank of Pakistan and the more market-determined exchange rate, were.

“We would view slippage on reform momentum as credit negative.” In the longer term, if the authorities were unable to pursue fiscal consolidation, “we expect Pakistan’s access to market financing to remain constrained,” it added.