Fitch Rat­ings says IMF ‘more vi­able’ fi­nanc­ing op­tion for Pak­istan

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Fitch Rat­ings termed the In­ter­na­tional Mon­e­tary Fund (IMF) as the ‘more vi­able’ lender for Pak­istan that is in dire need of fi­nan­cial but­tress to fix its ex­ter­nal im­bal­ances.

“We ex­pect the au­thor­i­ties to ex­plore fi­nanc­ing op­tions af­ter the elec­tions when, for ex­am­ple, an agree­ment with the IMF might be­come more vi­able,” US credit rat­ings agency said. “Pak­istan’s last three-year IMF pro­gram, which be­gan in Septem­ber 2016, sup­ported a re­cov­ery in for­eign re­serves and was marked by a shift to macroe­co­nomic pol­icy more fo­cused on sta­bil­ity.”

Fitch Rat­ings pro­jected the cur­rent ac­count deficit to reach 5.3 per­cent of GDP in the fis­cal year ended June com­pared with 4.7 per­cent pre­vi­ously. It also re­vised up the fis­cal deficit fore­cast to six per­cent for FY2018 from the Jan­uary’s pro­jec­tion of five per­cent.

“Fur­ther and con­sid­er­able pol­icy ef­forts would be re­quired to sta­bilise the ex­ter­nal po­si­tion, and a new govern­ment has lim­ited time to act af­ter the 25 July elec­tions, as ex­ter­nal debt obli­ga­tions will pick up more rapidly in 2019,” it said. “The cost (of ex­ter­nal fi­nanc­ing) could in­crease fur­ther amid con­tin­ued global mon­e­tary tight­en­ing and ris­ing geopo­lit­i­cal pres­sures. Vul­ner­a­bil­i­ties could be tested as ris­ing debt-ser­vic­ing pay­ments start to add to ex­ter­nal fund­ing re­quire­ments from 2019.”

Fitch Rat­ings said de­clin­ing for­eign ex­change re­serves and widen­ing cur­rent ac­count deficit are adding to the coun­try’s ex­ter­nal fi­nanc­ing risks and it “leaves a lim­ited buf­fer in the event of prob­lems ac­cess­ing in­ter­na­tional mar­kets or bi­lat­eral lend­ing.”

“China’s con­tin­ued will­ing­ness to pro­vide fi­nanc­ing through bi­lat­eral and pol­icy-bank lend­ing and likely in­flows from the tax amnesty scheme limit near-term risks, as could mar­ket ex­pec­ta­tions of an even­tual IMF agree­ment,” it added.

“Nev­er­the­less, Pak­istan’s cost of ex­ter­nal mar­ket fi­nanc­ing has risen in re­cent months, with yields on the govern­ment’s Novem­ber 2017 10-year Eurobond up more than 200bp (ba­sis points) since is­suance.”

Fitch Rat­ings said the mon­e­tary au­thor­i­ties have taken some steps in re­cent months to ad­dress the de­te­ri­o­ra­tion in the ex­ter­nal po­si­tion.

The State Bank of Pak­istan in­creased its pol­icy rate twice by a cu­mu­la­tive 75 ba­sis points since mid-Jan­uary to cool do­mes­tic de­mand. It has also in­tro­duced greater flex­i­bil­ity in the heav­ily man­aged ru­pee by al­low­ing three sep­a­rate step de­pre­ci­a­tions since mid-De­cem­ber 2017 of a cu­mu­la­tive 13 per­cent against dol­lar.

“These poli­cies have eased some pres­sure on re­serves and may even­tu­ally sup­port a nar­row­ing of the cur­rent ac­count deficit, but their mag­ni­tude so far has not been suf­fi­cient to pre­vent ex­ter­nal fi­nances de­te­ri­o­rat­ing more sharply than we ex­pected when we placed Pak­istan’s sovereign rat­ing of ‘B’ on neg­a­tive out­look in Jan­uary,” Fitch Rat­ings said.

Fitch Rat­ings said a sig­nif­i­cant pol­icy shift to sta­bilise ex­ter­nal fi­nances is still pos­si­ble fol­low­ing the gen­eral elec­tions, “when a newly elected govern­ment may have more po­lit­i­cal lee­way to im­ple­ment mea­sures that are likely to slow the econ­omy.”

In Jan­uary, it said the up­com­ing elec­tions are likely to con­strain the govern­ment’s abil­ity to ad­dress ex­ter­nal prob­lems “con­vinc­ingly in the near term.”

Fitch Rat­ings said eco­nomic growth has been ro­bust over the past year, and “we ex­pect the econ­omy to ex­pand by 5.5 per­cent in FY2018.”

“How­ever, we have re­vised down our FY19 growth es­ti­mate to 5 per­cent from 5.5 per­cent in the Jan­uary re­view, to re­flect the likely im­pact of fur­ther tight­en­ing mea­sures to al­le­vi­ate ex­ter­nal im­bal­ances.”

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