EDITORIAL: Fitch has upgraded Pakistan’s long-term foreign currency issuer default rating from CCC+ to B- which is defined as from substantial credit risk (default is a possibility) to highly speculative (material default risk is present but a limited margin of safety remains with capacity for continued payments vulnerable to deterioration in the business and economic environment).
While critics may point to continued negative large scale manufacturing sector (LSM) – recent data suggesting that the contraction in February this year was negative 1.90 percent – as well as the distinct likelihood of the International Monetary Fund (IMF) not giving any leeway to the government to phase out politically challenging fiscal measures, including the tax on traders as well as collections under the farm tax already legislated by all four provincial assemblies with the pledge to implement them from 1 July with effectivity from 1 January 2025, yet this upgrade is without doubt a positive factor that going forward may enable the government to not only procure commercial loans at reasonable/affordable rates but also to issue debt equity Sukuk/Eurobonds.
The option available to the government as repeatedly highlighted by Business Recorder is to slash its own current expenditure, a non-growth inflationary outlay that has been consistently allowed to rise from one year to the next seen by the taxpayers as a measure that ensures elite capture of their tax rupees.
It is relevant to note however that Fitch had raised Pakistan’s rating from CCC to CCC+ in July 2024, soon after the government secured a staff level agreement on the Extended Fund Facility programme; however, the two ratings reflected substantial credit risk with default a distinct possibility.
Moody’s had also upgraded Pakistan’s rating from Caa3 to Caa2 in August 2024 on the assumption that the IMF Board would approve the SLA that the rating agency defined as junk and highly speculative. Moody’s has yet to upgrade the rating this year.
In this context, it is relevant to note that Fitch B- rating is considered to be equivalent to Moody’s B3 rating or in effect Moody’s will have to upgrade two notches from Caa2 to Caa1 and then to B- to give a comparable rating to Pakistan.
The third major international rating agency, Standard and Poor (S&P), has kept Pakistan rating unchanged at CCC+ since October 2022 though it issued a report on the country in July 2024 considered equivalent to Moody’s Caa1 and Fitch’s CCC.
Time will tell whether Moody’s and S&P will make the upgrade though it must be borne in mind that an upgrade would keep Pakistan at the lower end of the highly speculative category.
Be that as it may, Fitch upgrade reflects the agency’s projection that Pakistan will continue to access external funding which implies that the country would continue to meet all IMF politically challenging conditions – quantitative time bound conditions, structural benchmarks as well as reforms - that are necessary to not only reach an SLA on the second review but also ensure the 16 billion dollar roll-overs by the three friendly countries who since 2019 have stipulated that the non-negotiable condition is for the country to remain on an active Fund programme. Or, in other words, as is repeatedly stated by Prime Minister Shehbaz Sharif and the Minister for Finance Mohammad Aurangzeb the country has no option but to implement reforms, read implement IMF conditions, and that this time around there will be no backtracking of reforms.
All positive projections by Fitch were premised on the country implementing the IMF programme conditions though it added two disturbing features; notably, “Prime Minister Shehbaz Sharif’s PML-N party and its allies received a mandate that was weaker than we expected in elections in early 2024, although they still have a constitutional majority in the National Assembly backed by the country’s influential military” and “Governments from across the political spectrum in Pakistan have had a mixed record of IMF programme performance often failing to implement or reversing the required reforms.”
Needless to add, the governments referred to by Fitch include the administrations of all three major national parties as well as overtly military led-governments.
However, the prevailing economic issues have less to do with who has led the administration and more to do with the elite that all administrations proactively wooed, and continue to do so to this day, through being the recipients of heavy budgetary outlay each year.
Unless the existing major recipients of our budgets voluntarily sacrifice their allocations it is doubtful if the recent upgrade would be sustainable in the medium to long term.
Copyright Business Recorder, 2025
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