Fitch Ratings has downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “CCC-” from “CCC+”, a statement from the agency said Tuesday. The downgrade reflects further sharp deterioration in external liquidity and funding conditions and the decline of foreign exchange reserves to critically low levels. Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing, and earlier FX intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place, the statement mentioned. “We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap.” The rating agency said that while it assumes a successful conclusion of the ninth review of Pakistan’s International Monetary Fund (IMF) programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections. “Default or debt restructuring is an increasingly real possibility, in our view,” the rating agency said. The agency added that external public-debt maturities in the remainder of the fiscal year ending June 2023 (FY23) amount to over $7 billion and would remain high in FY24. Of the $7 billion remaining for FY23, $3 billion represent deposits from China’s State Administration of Foreign Exchange (SAFE) that are likely to be rolled over, and $1.7 billion are loans from Chinese commercial banks which Fitch also assumes would be refinanced in the near future. The SAFE deposits are scheduled to mature in two instalments – $2 billion in March and $1 billion in June. Pakistan’s CAD was $3.7 billion in the second half of FY2022, down from $9 billion in the same period of FY2021. As such, Fitch forecasts a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 after $17 billion (4.6% of GDP) in FY2022.