Fitch Ratings said on Wednesday it believed recent Pakistani policy adjustment measures would help reduce growing external risks.
Fitch Ratings Inc, a US credit rating agency and one of the ‘big three’ along with Moody’s and Standard & Poor’s, added that ongoing reforms, if continued, could create positive momentum for the ‘B’ rating. – “of the sovereign, which she affirmed in May 2021 with a” Stable Perspective “.
“Fitch Ratings believes that Pakistan’s recent policy adjustments and demonstrated access to external finance, as well as its commitment to a market-determined exchange rate, have offset growing external risks due to the worsening current account deficit, “the agency said in a report titled” Reforms and Financial Support Mitigate Pakistan’s Sovereign Risks, “released Wednesday.
The report comes just days after the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided to increase the policy rate by 150 basis points to 8.75%. The MPC estimated that inflation and balance-of-payments risks have increased as growth prospects have continued to improve.
We believe that external liquidity pressures should be manageable in the short term, despite the growing current account deficit, given Pakistan’s adequate foreign exchange reserves and access to finance: Fitch
Monetary policy: the SBP raises its key rate by 150 basis points, bringing it to 8.75%
At the same time, Fitch said the ongoing reforms, if sustained, could create positive momentum for the Sovereign’s “B-” rating, “which we affirmed in May 2021 with a stable outlook.”
Fitch predicts that Pakistan’s current account deficit in the current fiscal year is expected to be larger than its previous forecast of 2.2% of GDP, due to rising global energy prices and a strong domestic recovery which “strained Pakistan’s external position. ”.
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“We believe that external pressures on liquidity should be manageable in the short term, despite the larger current account deficit, given Pakistan’s adequate foreign exchange reserves and access to finance,” Fitch said.
Fitch expects Pakistan rupee to weaken further in 2022
Speaking on the recently reached staff level agreement between the International Monetary Fund (IMF) and government officials, Fitch said he expects the IMF to release an additional $ 1 billion in funding, to provided that certain preliminary measures are respected.
“We believe that it is notably a question of modifying the SBP law to formalize the institutional independence of the central bank and to remove certain tax exemptions. The authorities’ sustained reform efforts and commitment to the IMF program are expected to promote access to external financing, although global financing conditions may become more difficult for emerging markets in 2022, as monetary policy parameters world become less accommodating. “
The agency believed that if the government maintained its commitment to a market-determined exchange rate, “we believe it would be a useful buffer to help contain longer-term external risks.”
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Fitch said an exchange rate that supports the price competitiveness of Pakistani exports could over time help reduce the country’s dependence on debt financing to balance its external accounts.
“In addition, fiscal consolidation under the Extended Financing Facility (EFF) could help reduce external imbalances by curbing imports, while reducing the impact of weak public finances on Pakistan’s rating.” , did he declare.
Political pressures could test the government’s commitment to reform, especially if inflation accelerates from already high levels: Fitch
“During our rating review in May, we noted that continued implementation of sufficient policies to facilitate the replenishment of foreign exchange reserves and the mitigation of external funding risks could lead to positive rating action.
“We also argued that a positive rating dynamic could result from improvements in the business environment or fiscal consolidation, if sustained over time. In our opinion, continued adherence to the reform program of the EFF would increase the likelihood of achieving these results.
However, political pressures could test the government’s commitment to reform, especially if inflation accelerates from its already high levels.
In a previous report, Fitch Ratings downgraded its forecast for the Pakistani rupee for this year and next due to various factors, including an increased flow of US dollars to neighboring Afghanistan.
Fitch’s forecast for the average rupee rate this year was 164 to the US dollar, down from 158 previously. For 2022, Fitch now expects an average rate of 180 against a previous forecast of 165.
“Our expectation of further weakening of the currency is based on the deterioration of Pakistan’s terms of trade, the tightening of US monetary policy, as well as the flow of US dollars from Pakistan to Afghanistan,” a- he said earlier.