Due to persistent external, economic, and fiscal risks, S&P Global reduced Pakistan’s long-term sovereign credit rating to “CCC+” from “B-” and its short-term rating to “C” from “B.”
The rating agency predicted that, barring a significant drop in oil prices or an increase in foreign aid, Pakistan’s already meagre foreign exchange reserves would remain under pressure throughout 2023.
Over the medium future, weaker economic and fiscal outcomes and refinancing difficulties will result from a succession of shocks, including severe floods, skyrocketing food and energy inflation, and rising global interest rates. According to the research, Pakistan also confronts significant political risks that could alter its future course. The agency kept its prognosis at steady.
The steady outlook takes into account both the possibility of more support from multilateral and bilateral partners and the potential for new threats to Pakistan’s external financial situation and fiscal performance over the following 12 months.
According to the agency, the ratings were reduced to reflect Pakistan’s continuous deterioration in terms of its external, fiscal, and economic parameters. Pakistan’s forecast for its balance of payments is still dependent on changes in energy prices as well as the availability and timing of foreign assistance due to the country’s large gross external financing needs and small foreign exchange reserves. We anticipate that the ratio of debt to GDP and budgetary deficits will continue to be high, and that more than 40% of government revenue will be required to pay interest, which will limit the government’s ability to fund social spending and investment.
According to the research, the summer of 2022’s catastrophic floods caused extra challenges for businesses and individuals, significantly limiting growth. Economic growth in Pakistan’s fiscal year 2023 (which ends in June 2023) will be substantially weaker than we had previously predicted. Along with the effects of the bad weather in August and September, the economy will also be affected by tighter domestic monetary conditions and higher inflation.
The Pakistani government’s efforts to modify its policies would meet challenging macroeconomic and political obstacles as well as public opposition to proposed phase-outs of social support measures. Following the floods, Pakistan’s economy will likely have a worse fiscal 2023 outlook. Domestic demand is meanwhile struggling with rising prices, particularly for basic commodities. At the national level, consumer price index (CPI) inflation has risen to more than 20% year over year and will continue to be high for the remainder of this fiscal year.
The IMF’s Extended Funding Facility (EFF) programme has seen the Pakistani government complete the seventh and eighth reviews satisfactorily, but new problems are now preventing it from reaching the performance standards for upcoming reviews. It further stated that around $4.0 billion has been spent so far under the EFF, which started in July 2019, including an allocation of $1.2 billion in August 2022.
The implementation of steps to consolidate the government’s significant fiscal deficit is made more difficult by the present inflationary climate, which is also accompanied by a significant slowdown in economic activity and, in some cases, serious humanitarian needs due to the floods. The government will find it more challenging than it did earlier in 2022 to generate a primary fiscal balance surplus and increase its stock of foreign exchange reserves.
The government has a limited amount of time to execute significant economic reforms, especially those that could jeopardise coalition members’ electoral support, as its term is expected to end by August 2023 or before. With continuous pressure from the opposition to seek early elections, the agency predicted that political unrest will stay high during the ensuing quarters.
A limited tax base and high internal and external security threats continue to be constraints on Pakistan’s credit ratings. The security situation in the country has gradually improved in recent years, but continued vulnerabilities reduce the efficacy of the government and harm the business environment. Long-term economic prospects for Pakistan are hampered by sporadic conflicts with India and the length of Pakistan’s land border with Afghanistan, it continued.
The nominal GDP per capita of Pakistan has continued to stagnate as a result of the recent devaluation of the Pakistani rupee against the US dollar. We anticipate GDP per capita to stabilise just above $1,500 by fiscal 2025 due to reduced real GDP growth estimates.
According to the agency’s forecast, Pakistan’s current account deficit will decrease from 4.7 percent of GDP this year to 3.3 percent of GDP in 2023. However, the report added, this improvement is highly dependent on the cost of energy and food as well as the continuation of administrative restrictions on imports.
Pakistan’s usable foreign exchange reserves are predicted to remain low, at only around one month’s worth of current account payments. The government’s financial condition is under pressure due to rising debt-servicing costs. The government’s ability to generate taxes is among the poorest of the graded sovereigns, with revenues at little over 12 percent of GDP.
Over the course of the upcoming year, pressure from high interest rates, rising inflation, and challenging market circumstances will continue to be placed on Pakistan’s fiscal and external positions. In comparison to 7.9% of GDP in fiscal 2022, we predict that the general government’s fiscal deficit will remain high in the current fiscal year at 6.5 percent of GDP.
The agency predicts that inflation will continue high through 2023 before starting to decline in the second half of that year. However, given Pakistan’s substantial portfolio of debt denominated in local currency, increasing interest rates will continue to pressure the government’s debt-servicing expenses during the following two to three years.