Fitch Downgrades Pakistan’s Long-Term Foreign Currency IDR to ‘CCC-‘

Global rating agency Fitch on Tuesday downgraded Pakistan's long-term foreign currency issuer default rating (IDR) to ‘CCC-‘ from ‘CCC+', citing further worsening in liquidity and policy risks along with pressure on foreign exchange reserves.^[0] Fitch stated that they downgraded their rating due to a rapid decrease in external liquidity, funding conditions and foreign exchange reserves to a critically low level.^[1]

The rating agency declared that, despite presuming a successful end to Pakistan's ninth review of the International Monetary Fund (IMF) programme, the downgrade also reflects the big potential danger to the program's continuity and financing, especially prior to the elections this year.^[0] It noted that shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate had held up the 9th review of Pakistan’s IMF programme, which was originally due in November 2022.^[2]

In the second half of FY2022, Pakistan's current account deficit was $3.7 billion, a decrease from $9 billion in the same period of FY2021.^[3] Fitch has forecasted that the full-year deficit for FY23 will be $4.7 billion (1.5% of GDP), following a deficit of $17 billion (4.6% of GDP)^[3] Restrictions on imports, foreign exchange availability, fiscal austerity, higher interest rates, and energy conservation efforts have all contributed to the decreased value of the Canadian dollar.^[2]

For the fiscal year of 2023, $7 billion remains, with $3 billion of this amount representing deposits from China's State Administration of Foreign Exchange (SAFE) that are likely to be renewed as well as $1.7 billion in loans from Chinese commercial banks that Fitch believes will be refinanced shortly.^[4]

Apart from the still-to-be-released IMF disbursement of $2.5 billion, Pakistan is anticipated to get $3.5 billion from multilateral lenders in FY23 when a deal is achieved with the IMF.^[5] Reports are circulating of more than $5 billion in extra contributions being weighed by allies, in addition to renewals of already-existing funding, though specifics regarding the amount and terms are yet to be determined.^[3] At a flood-relief conference in January 2023, Pakistan was promised $10 billion in aid, largely composed of loans.^[5]

Fitch declared that if more funding is made available, the Current Account Deficit (CAD) in Pakistan might arise again, due to the build-up of unpaid imports in the country's ports.^[5]

0. “Nation expresses upset over Fitch downgrading Pakistan's rating to CCC-” Global Village space, 15 Feb. 2023, https://www.globalvillagespace.com/nation-expresses-upset-over-fitch-downgrading-pakistans-rating-to-ccc/

1. “Fitch Downgrades Pakistan's Rating, Warns Default A ‘Real Possibility'” NDTV, 14 Feb. 2023, https://www.ndtv.com/world-news/fitch-downgrades-pakistans-rating-warns-default-a-real-possibility-3783047

2. “Fitch Ratings downgrades Pakistan's foreign-currency IDR to ‘CCC-‘” Business Recorder, 14 Feb. 2023, https://www.brecorder.com/news/40226229

3. “Fitch downgrades Pakistan” The Express Tribune, 15 Feb. 2023, https://tribune.com.pk/story/2401131/fitch-downgrades-pakistans-sovereign-rating-to-ccc

4. “Fitch downgrades Pakistan's rating, says default a real possibility” msnNOW, 14 Feb. 2023, https://www.msn.com/en-in/news/world/fitch-downgrades-pakistans-rating-says-default-a-real-possibility/ar-AA17sUiV

5. “Fitch downgrades Pakistan’s troubled economy to “-CCC”” SAMAA English, 14 Feb. 2023, https://www.samaaenglish.tv/news/40027590