Daily Times

Fitch Ratings has projected that Pakistan’s current account deficit (CAD) will narrow to 0.5 percent of gross domestic product (GDP) in the current fiscal year from 1.7 percent recorded in last financial year due to a surge in remittance inflows, import compression, and low average oil prices.

According to the rating agency, remittance growth averaged nearly 30 percent on a year-on-year (yoy) basis in FY21, reflecting a shift from informal to formal remittance channels and an underlying increase in transfers from non-resident Pakistanis. Export growth, which is key to medium-term external sustainability, has also picked up, but from low levels.

“We forecast a widening of the current account deficit to 1.9 percent of GDP in FY22 as the recovery in domestic demand and higher oil prices push imports higher.”

Pakistan’s ‘B-‘ rating reflects weak public finances, external finance vulnerabilities, and low governance indicator scores. The authorities have made progress in addressing external and public finance challenges over the past few years, despite the headwinds from the Covid-19 pandemic. However, economic uncertainties from the pandemic and political challenges to keeping the reform agenda on track pose risks.

A decline in external vulnerabilities has been facilitated by adherence to a market-determined exchange-rate regime, which has served as a shock absorber during the pandemic. Progress towards institutionalising this framework, if sustained, should limit medium-term risks by keeping current account deficits contained and reducing foreign-exchange (FX) reserve pressures.

External inflows have supported an appreciation of the Pakistan rupee against the US dollar and a further rebuilding of FX reserves. Fitch forecasts that official FX reserves (excluding gold) will reach USD17.4 billion (3.2 months of current external payments; 2021 B median: 4.7 months) by the end of the fiscal year to June 2021 (FY21) from USD13.3 billion at FYE20.

“Under our baseline, reserves are expected to rise to USD22.3 billion by FYE22, including a planned USD2.8 billion boost from the IMF’s special drawing rights allocation,” said Fitch.

External debt repayments will remain high, at about USD8 billion-10 billion per annum over the next few years. Participation in the G-20’s Debt Service Suspension Initiative (DSSI) has reduced near-term pressures by postponing USD3.7 billion in payments previously scheduled between May 2020 and December 2021 to over a five- to six-year period.

Access to external financing from multilateral, bilateral and private sources has been sustained, facilitated by the government’s policy reforms and continued progress in meeting conditions under the Extended Fund Facility (EFF) programme with the IMF.

The State Bank of Pakistan (SBP) said on Thursday last that foreign exchange reserves of the country stood at $23,015.90 million by the week ended May 21, 2021. The foreign exchange reserves held by the central bank stand at $15,862 million, while reserves held by commercial banks stand at $7,153.90 million by the week ended May 21, 2021, according to data released by the SBP.