HONG KONG: The recent fall in Pakistan’s foreign-exchange reserves and widening of its current account are manageable, Fitch Ratings said in a statement issued on Thursday.
The country is also unlikely to face significant external-financing difficulties in the short term.
“The three-year IMF-supported programme that ended in September 2016 helped drive a general improvement in Pakistan’s macroeconomic stability. In particular, it reversed a sharp decline in foreign reserves,” it said.
However, the statement added that there have been signs of a re-emergence of external pressures since the end of the IMF programme.
Foreign reserves, for example, fell for five consecutive months from October. The current-account deficit reached $2.6 billion in January-March 2016-17, the highest since September-December 2008.
“The widening resulted from slower growth in remittances, the rise in global oil prices and imports associated with infrastructure projects in the China-Pakistan Economic Corridor (CPEC),” it said.
Nevertheless, the situation is a long way from the one that Pakistan faced prior to the IMF agreement in 2013, the statement said. The decline in foreign reserves has been small in the context of the large build-up recorded during the IMF programme.
Fitch said the State Bank of Pakistan has been able to keep the rupee stable against the dollar over the last 18 months, even during periods of dollar appreciation. In contrast, there was a sharp depreciation of the rupee in the years leading up to the IMF agreement, even as reserves fell at a rapid rate.
Importantly, there does not appear to have been a significant deterioration in Pakistan’s international financing conditions. Yields and credit default swaps on sovereign debt have generally been on a downward trend since mid-2016, and are low compared with 2013.
“The widening of the current-account deficit has exceeded our assumptions when we affirmed Pakistan’s rating at ‘B’/Stable in February,” the rating agency said. “We had expected higher capital imports and a gradual recovery in energy prices to widen the current-account deficit to 1.6pc of GDP in FY17 and 2pc in FY18, from 1.2pc in FY16.”
There is now an upside risk to those forecasts, particularly in FY17. However, the current-account deficit is unlikely to widen by enough to create significant strains, as long as oil prices do not spike higher than we currently expect. Moreover, imports related to the CPEC will be largely offset by equivalent financing from China, it said.