Fitch predicts 4% growth for Pakistan in fiscal 2022

KARACHI: Credit rating agency Fitch Ratings expects Pakistan’s growth to stabilize at 4% in the next fiscal year, supported by continued strengthening in domestic consumption and resilient manufacturing and construction activity.

While asserting the default rating of Pakistan’s long-term currency issuers at “B-” with a stable outlook, Fitch said the economy so far appears to have weathered the pandemic shock well relative to its peers. Growth is estimated at 3.9% this fiscal year, compared to a contraction of 0.5% a year earlier.

“However, the economic uncertainties associated with the pandemic and the political challenges to keep the reform program on track present risks,” Fitch said in a statement Thursday evening.

Fitch expects key rates to hike just 25 basis points from the current 7% in FY22. “There are still risks that inflationary pressures will prove to be more persistent, especially given a negative real policy rate, which could lead to further tightening of the SBP. [State Bank of Pakistan]. “

The rating agency said Pakistan’s “B-” rating reflects weak public finances, vulnerabilities in external finances and low scores on governance indicators.

“A decrease in external vulnerabilities was facilitated by adhering to a market-determined exchange rate regime, which served as a shock absorber during the pandemic,” he said. “Progress towards institutionalizing this framework, if sustained, should limit medium-term risks by keeping current account deficits contained and reducing pressures on foreign exchange reserves.”

Fitch predicts that the current account deficit will narrow to 0.5% of GDP in FY21, from 1.7% in FY20, due to a sharp increase in remittances, squeezing imports and weak markets. average oil prices.

“Growth in remittances averaged nearly 30 percent in FY21, reflecting a shift from informal to formal remittances channels and an underlying increase in remittances from non-Pakistanis. residents, ”he said. “Export growth, which is the key to medium-term external viability, has also accelerated, but from low levels.”

However, the current account deficit is expected to widen to 1.9% of GDP in FY22, as rebounding domestic demand and rising oil prices push imports up. External debt repayments are expected to remain high, in the order of $ 8 billion to $ 10 billion per year over the next few years. Participation in the G-20 debt service suspension initiative reduced short-term pressures by deferring $ 3.7 billion in payments previously scheduled between May 2020 and December 2021 over a period of five to six years , Fitch said.

Fitch said access to external finance from multilateral, bilateral and private sources has been maintained, facilitated by the government’s policy reforms and continued progress in qualifying under the expanded finance facility program with the Fund. international monetary policy.

“The March 2021 Pakistani Eurobond issue of $ 2.5 billion has generated strong investor demand. China remains a key source of bilateral funding, providing approximately $ 2.3 billion in budget support in FY21, and increasing the size of the currency swap agreement between the People’s Bank of China and the $ 1.5 billion State Bank of Pakistan, which was used to help repay $ 2. billion Saudi Arabia deposits in FY21, ”he said.

Fitch forecasts a decline in the debt-to-GDP ratio to 83.7% in FY21, from 87.2% in FY20, due to the appreciation of the rupee against the US dollar and strong nominal GDP growth. “This remains high compared to the ratio of 68.3% of the median ‘B’ in 2021. According to our baseline scenario, fiscal consolidation and strong nominal GDP growth will lead to a gradual downward trajectory of the debt ratio. to about 79% of GDP by FY22. The government continued to improve its debt management practices with extended maturities on domestic debt, reducing refinancing risks. “

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