Fitch rating upgrade a thumbs up for Pakistan

The global rating agency’s move is an acknowledgement of the government’s hard work in recent months to turn around the country’s ramshackle economy.

By Muhammad Ali

ISLAMABAD: In a clear acknowledgement of Pakistan’s improving economic fortunes, the global ratings agency Fitch has upgraded the country’s long-term foreign-currency Issuer Default Rating (IDR) to ‘CCC’ from ‘CCC-‘.

Coming in the wake of Pakistan’s staff-level agreement with the International Monetary Fund (IMF) about a USD 3 billion Stand-By Arrangement (SBA), the upgrade is a recognition of the hard work and reforms that the government of Pakistan has undertaken in recent months.

The upgrade is a positive signal for the Pakistani economy, and one of several similar decisions by multiple international rating agencies that should together help boost investor confidence.

In a similar move last week, Moody’s conceded that the Fund’s Stand-By Arrangement (SBA) would help Islamabad with liquidity over the next few months, in addition to oiling the wheels of financing from other bilateral and multilateral partners

Also last week, Barclays voiced similar opinions when it upgraded Pakistan’s sovereign bonds from ‘underweight’ to ‘market weight’. The string of upgrades should help improve Pakistan’s access to international capital markets, important for financing its development needs.

Fitch supported its upgrade with an in-depth analysis of Pakistan’s economy, highlighting the factors that led to its decision. As would be expected, the progress made with the IMF bailout program figured prominently in the analysis – as did the significant reduction in the fiscal deficit in the first half of FY2023.

Fitch noted that Pakistan’s improved current account balance is driven by “earlier restrictions on imports and FX availability, tighter fiscal and economic policies, measures to limit energy consumption and lower commodity prices”.

It said the upgrade reflects Pakistan’s improved external liquidity and funding conditions following its SLA with the IMF on the nine-month SBA last month.

Fitch said, “We expect the SLA to be approved by the IMF board in July, catalysing other funding and anchoring policies around parliamentary elections due by October. Nevertheless, programme implementation and external funding risks remain due to a volatile political climate and large external financing requirement.

The IMF executive board’s approval of the SBA is expected to unlock an immediate disbursement of USD 1.2 billion, with the remaining USD 1.8 billion scheduled after reviews in November and February 2024.

Saudi Arabia and the United Arab Emirates have committed another USD 3 billion in deposits, and the authorities expect USD 3-5 billion in other new multilateral funding after the IMF agreement. The SBA should also facilitate disbursement of some of the USD 10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans (USD 2 billion in the budget).

Fitch also mentioned Pakistan’s flimsy foreign exchange cushion, political volatility, a gaping fiscal deficit, and high level of indebtedness as factoring into its decision. It also noted Pakistan is considering to seek maturity extensions on loans by non-Paris club bilateral creditors. “We understand that such maturity extensions would mostly relate to loans and deposits by China, Saudi Arabia and the UAE, which are already regularly rolled over”, it said.

The upgrade does not mean that Pakistan’s economic problems are over. The country still faces a number of challenges, including high levels of debt, a weak financial sector, and political instability. The government will need to continue to implement reforms in order to maintain the upgrade and improve the long-term outlook for the economy.