‘Fitch ratings’ is one of the renowned credit rating companies warned Pakistan on Tuesday about its weakening economy and depleting foreign reserves.
Pakistan’s sharply declining foreign reserves and expanding current account deficit are putting the country at external financial risks, the company said in a press release.
The external debt obligations will increase more rapidly in 2019 due to less time the current government has, and upcoming general elections. Pakistan needs to focus on swift policy to stabilize the external position, the statement said. However, the press release has not mentioned what steps would require to strengthen the current position.
The report pointed out depreciations that were being made since December 2017, which accounted for 13 percent against the dollar, these steps were taken by the monetary authorities which provided some cushion to the reserves but the size of measures is not enough to cope with external finances deteriorating more sharply. The firm rated Pakistan’s B rating to negative after all this.
The firm also hints at more exchange rate depreciation in the future. The firm projects that Pakistan’s current account deficit would reach 5.3 percent GDP during the fiscal year 2018, as compared to 4.7 percent previously. Exports were improved by imports were higher, high oil prices also added to imbalances.
The fiscal deficit is likely to increase by 6 percent of GDP during the FY18-19, compared to the firm’s January forecast of 5 percent, this is because the government is relying more on external borrowing—particularly from Chinese banks.
The current situation is quite challenging for the next government but it’s not unmanageable, China’s willingness to finance through bilateral and policy bank lending and amnesty scheme would limit the short terms risks but in the long run it could be troublesome if not considered, said the firm.
The cost of borrowing for Pakistan is increasing as well, global political situations can further increase the cost of borrowing for the country. “There are vulnerabilities that need attention as rising debt-servicing payments start to add to external funding requirements from 2019.”
According to Fitch, the next government should have to take policy shift measures in order to bring the country back on track, the measures required from the next government would also affect and slow down the economy in a short-term but it would eventually stabilize the economy for future growth.
“We hope the authorities would explore financing options after the elections 2018 have been completed,” the firm said, adding an IMF programme “could become a more viable option for Pakistan.”
However, the next government seems to be focusing more on bilateral and multilateral financing options along with bonds rather than going after IMF’s programme. Pakistan’s Economic growth has been good over the past year, the firm also expects the economy to grow by 5.5 percent in FY18-19 however, the company has revised the forecast in January which indicates 5.0 percent growth due to external imbalances and its impact.