Fitch Ratings, the global credit rating agency, recently downgraded Pakistan’s long-term foreign currency issuer default rating (IDR) from CCC+ to CCC-. This means that Pakistan’s creditworthiness has further deteriorated, and the country is now closer to defaulting on its international debt obligations.
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The downgrade is a reflection of Pakistan’s worsening economic situation, which has been exacerbated by the Covid-19 pandemic. The country is facing a severe balance of payments crisis, with a widening current account deficit and declining foreign exchange reserves. The government’s efforts to reduce the deficit by curbing imports and increasing exports have not yielded the desired results, and the IMF’s conditions for a bailout package have been difficult to meet.
Pakistan’s debt burden has also been rising, with the country’s public debt exceeding 100% of GDP. This has been compounded by the government’s reliance on short-term borrowing from domestic banks, which has crowded out private-sector credit and led to higher interest rates.
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Political risks playing a ‘default’ role
Fitch has also highlighted the political risks in Pakistan, with the ongoing tensions with India, internal security challenges, and the government’s strained relations with the opposition. The agency has expressed concerns over the government’s ability to implement structural reforms and address the underlying imbalances in the economy.
The downgrade is likely to make it more difficult for Pakistan to access international markets for borrowing and could lead to higher borrowing costs. It also highlights the urgent need for the government to undertake bold and decisive reforms to address the economic challenges facing the country. This would require addressing the structural weaknesses in the economy, improving the business environment, and enhancing the productivity of the private sector. It would also require a more sustainable fiscal policy, with a focus on reducing the budget deficit and the debt burden, and mobilizing domestic revenue through tax reforms.
Overall, the Fitch downgrade underscores the need for Pakistan to urgently address its economic challenges, and to undertake a comprehensive reform agenda to put the country on a path to sustained growth and stability.
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