Fitch Ratings has affirmed Pakistan’s long-term foreign-currency issuer default rating (IDR) at ‘B-‘ with a stable outlook. In a latest report, Fitch Ratings said that Pakistan’s rating reflects external vulnerabilities, a narrow fiscal revenue base and low governance indicator scores, with GDP growth and most public finance metrics largely in line with peers following a rebasing of GDP. Recent reforms include measures to improve public finances and amendments to the State Bank of Pakistan (SBP) Act, could further entrench the policy shift in recent years towards greater central bank independence and a market determined exchange rate, bolstering Pakistan’s resilience to external shocks. However, a challenging external backdrop of high oil prices and global monetary-policy tightening poses risks; while political pressure could blunt reform momentum, particularly with the conclusion of the IMF programme in September 2022 and elections due by mid-2023, said Fitch. It said the risks from a widening current account deficit are likely to remain manageable in light of policy tightening, though sustained high oil prices pose a clear downside risk. “We forecast the deficit to widen to around 4pc of GDP in the fiscal year ending June 2022 (FY22), from 0.6pc in FY21. Import pressure should ease from 2HFY22, reducing the deficit to 3.0pc in FY23 in our forecasts. We expect remittances to remain elevated at current levels over the next couple of years. Strong export performance should also continue, but this comes from a low base,” said Fitch. The report said that access to external financing from multilateral, bilateral and private creditors has been sustained, facilitated by policy reforms and progress under the IMF’s Extended Fund Facility (EFF) programme. Pakistan raised USD1 billion through a seven-year sukuk with a yield of 7.95pc in January 2022 and plans further eurobond issuances in FY22. “We forecast foreign exchange reserves, including gold, to remain stable at around USD23 billion (3.2 months of current external payments) over the next couple of years, as debt repayments have offset inflows. This is about USD11 billion above 2019 reserve levels. The commitment to a market-determined exchange rate limits downside risks to reserve,” said Fitch. It said that Pakistan faces annual external debt repayments of about USD13 billion-14 billion, including a cumulative USD3.8 billion in international bond maturities, through FY26. The current account deficit and foreign-currency reserve build-up has largely been debt financed, although authorities have diversified funding sources and extended maturities. Fitch forecasts the general government fiscal deficit will fall further to 5.6pc in FY22 and 4.7pc in FY23, from 6.1pc in FY21, on the back of revenue reforms passed in the recent supplementary budget and planned for the FY23 budget. These measures could put public finances on a more sustainable footing. However, high interest payments constrain fiscal flexibility, said Fitch. “We forecast general government debt to decline to around 70pc of GDP in FY22, which is the ‘B’ median, from about 72pc in FY21, and to remain on a downward trend to 62pc by FY26.” This is supported by the narrowing fiscal deficit and high nominal GDP growth. Pakistan’s debt/GDP ratio dropped by 11.8pp following a GDP rebasing in FY21, from a pre-rebasing level of 83.6pc. However, as a share of revenue, we forecast elevated debt of 518pc in FY22, compared with a ‘B’ median of 320pc. Fitch said it forecasts GDP growth of 4.5pc in FY22, slowing modestly from 5.6pc in FY21. Economic momentum is supported by sound manufacturing performance and a continued recovery in consumption, as Covid-19 pandemic-related challenges recede. The slight deceleration in the growth rate reflects base effects and the impact of fiscal and monetary policy tightening. “High inflation poses a downside risk to the macro outlook. We expect the economy to expand by 5pc in FY23 and over the medium term.”