EDITORIAL: In its latest report, Fitch, one of the three major international rating agencies, has maintained that progress on difficult structural reforms will be the key to reaching a staff-level agreement on the first review with the International Monetary Fund (IMF) on the ongoing Extended Fund Facility programme scheduled for the end of this month/early March.
Fitch upgraded Pakistan on 29 July 2024 to CCC+, from CCC on 10 July 2023, an upgrade at the time from CCC- on 14 February 2023. It is relevant to note that ratings between CCC- and CCC+ denote a very high level of default risk to other issuers or obligations and are associated with an inability of the debtor country to access commercial loans and/or debt equity (issuance of sukuk/Eurbonds) at rates that are affordable.
In this context, it is relevant to note that around 6 billion dollars of commercial loans and sukuk budgeted for the current year have not materialised though the Federal Finance Minister Muhammad Aurangzeb stated during his attendance at World Economic Forum in Davos, Switzerland, last month that one billion dollars had been agreed with two Middle East banks at the rate of 7 percent per annum.
It is unclear whether this amount has been disbursed as the State Bank of Pakistan website has not yet updated this amount.
What is significant is that from 28 February 2022 till 20 October 2022 Fitch rating for Pakistan was B- and this denotes a significantly elevated, rather than a very high level of default risk – a rating in spite of the disastrous policy of the former Prime Minister Imran Khan to extend unprecedentedly high subsidies to the energy sector effective 1 March 2022.
However, his government fell on 7 April 2022 with the subsidy continuing till end May early June 2022.
It is critical to note that in spite of claims to the contrary it was during the tenure of Miftah Ismail as the country’s finance minister that Pakistan’s rating was downgraded though Ishaq Dar’s appointment as the finance minister end September that year no doubt played a critical role in the downgrade as he began implementing two major flawed policies – extending 110 billion rupee electricity subsidy to the industrial sector and controlling the rupee-dollar parity that led to multiple exchange rates and the cessation of 4 billion dollar remittance inflows through official channels.
Be that as it may, Fitch has noted that there has been progress on fiscal reforms despite some setbacks.
There has been a shortfall of 468 billion rupees from the budgeted revenue collection July-January 2025 and while no privatisation deal took place during this period, its proceeds were budgeted at only 30 billion rupees, yet in the event of privatisation the proceeds could have been used to meet the revenue target.
This shortfall, unless met, would imply the implementation of agreed contingency measures that envisage higher indirect taxes on certain items, whose incidence on the poor is greater than on the rich.
The projected GDP growth of 3.2 percent is unlikely to be met as the government agreed to curtailment of all subsidies to the industrial sector, which has negative repercussions on growth.
And the current account surplus is on the back of import curtailment with exports rising during the first six months of the current year due to Pakistan taking advantage of the India’s decision to ban exports of rice, lifted since, and Bangladesh’s dip in exports due to the political crisis, which has since been largely resolved.
There are also concerns expressed by independent economists that poverty levels have risen to 44 percent, from 41 percent as calculated by the World Bank two years ago, mainly because of a contracting economy, high inflation that continues to be under-estimated by the Pakistan Bureau of Statistics (by considering subsidised electricity tariffs rather than the average, understating rent) and failing to synchronise dependent sectors; for example, cement and building sub-sectors.
Fitch has also noted that declining external liquidity linked to delays in IMF reviews could lead to negative action and there are serious concerns that the budgeted external inflows are not materializing as structural reforms are pending in several sectors, particularly the tax and energy sectors.
The latter continues to pass on inefficiencies to consumers that is not only crippling competitiveness of large-scale manufacturing sector with the rest of the world but also eroding the value of each rupee earned by the general public.
The only sector whose wages are raised every budget by more than the rate of inflation is the 7 percent of the workforce that is paid at the taxpayer’s expense.
One would hope that the government desists from this practice and slashes current expenditure as a means to reduce the pressure on raising taxes for the year or two that is required to stabilise the economy.
Copyright Business Recorder, 2025
Comments
Comments are closed.