External finance risks constrain PTI government: Fitch Ratings

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islamabad (Daily P.Times): Pakistan’s incoming Pakistan Tehreek-e-Insaf-led coalition government will be under immediate pressure to arrest the deterioration in external finances and address fiscal challenges, Fitch Ratings agency said in a statement.
The new government has more political capital to take positive though difficult policy actions, but it has a thin majority in parliament and faces a strong opposition, which could complicate policymaking, the agency cautioned in an assessment of Pakistan’s current fiscal policies.
“PTI leader Imran Khan outlined a broad economic agenda for a ‘New Pakistan’ during his campaign, with a focus on confronting corruption, reducing inequality and expanding social services. However, advancement of this policy agenda is likely to be limited in the short term, with external and fiscal problems taking priority,” Fitch said in its press release.

The current account deficit reached 5.6% of GDP in the fiscal year ended June 2018 (FY18), up from 4.7% in FY17, while liquid foreign-exchange reserves fell by almost US$4 billion from end-December 2017 to end-July 2018 to just over US$10 billion, the agency pointed out.
The sharp rise in global risk aversion towards emerging markets, and a projected pickup in Pakistan’s external debt obligations in 2019 are adding to financing pressures. The fiscal deficit has also widened and is likely to well exceed our previous estimate of 6% of GDP in FY18, up from 5.8% a year earlier, Fitch said.
The ratings agency revised its outlook on Pakistan’s ‘B’ rating to Negative from Stable in January 2018 to reflect these rising external and fiscal pressures.
“The State Bank of Pakistan has already taken some steps, raising its policy rate by 175bp since January 2018 and introducing greater flexibility in the heavily managed rupee by allowing four separate depreciations since mid-December 2017, which resulted in a cumulative 17% decline against the US dollar. These measures have so far not been enough to prevent the widening of the large external financing gap, which has been bridged with support from China, including an agreement to provide US$2 billion in additional bilateral lending in July. The Saudi-backed Islamic Development Bank has also reportedly extended a US$4 billion loan,” the company stated.

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