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S&P Global Ratings Downgrades Pakistan’s Credit Score

Agency’s decrease, from B- to CCC+, comes as country’s foreign exchange reserves drop to 8-year low

by Staff Report

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S&P Global Ratings on Thursday downgraded Pakistan’s credit score from B- to CCC+, citing several shocks to the country’s economy—floods, inflation—for deteriorating the country’s external, fiscal and economic metrics.

According to S&P, Pakistan’s dwindling foreign reserves are expected to remain under pressure in the coming year, especially in the face of political risks due to ongoing protests by the Pakistan Tehreek-e-Insaf. “Pakistan’s already low foreign exchange reserves will remain under pressure throughout 2023, barring a material decline in oil prices or a step-up in foreign assistance,” read the statement authored by S&P analysts Andrew Wood and YeeFarn Phua.

However, while downgrading Pakistan’s credit score, S&P raised the overall outlook for the country from negative to stable. It emphasized that the country faces a major economic crisis due to its foreign exchange reserves, which are currently sufficient to only cover one month of imports. In addition, it said, a delay in reviving its loan program with the International Monetary Fund had raised investor pessimism over Pakistan’s ability to fulfill its foreign debt obligations, with long-term dollar bonds continuing to trade at distressed levels despite the payment of a $1 billion bond this month.

Pointing to this year’s devastating floods, inflation and rising global interest rates, S&P said this would further depress Pakistan’s economic and fiscal outcomes that could also pose refinancing challenges over the medium-term.

The agency also pointed to the short time remaining for the incumbent government—set to proceed to elections next August—noting that this meant it had limited time to implement economic reforms. “We expect political uncertainty to remain elevated over the coming quarters, with continued pressure from the opposition to hold early elections,” it added.

Declining reserves

Also on Thursday, the State Bank of Pakistan issued its weekly data, showing that foreign exchange reserves had declined by $584 million in the week ending Dec. 16, reaching $6.1 billion, the lowest since April 2014.

According to the central bank’s data, Pakistan’s foreign exchange reserves have declined by $11.6 billion in the past 12 months, with total liquid foreign reserves currently at $12 billion after including the $5.9 billion held by commercial banks. While Finance Minister Ishaq Dar has repeatedly claimed that this would not have any impact on Pakistan’s debt servicing, economic experts—including his predecessor Miftah Ismail—have claimed that the threat of default persists without IMF intervention.

Pakistan is currently in the midst of a $7 billion IMF Extended Fund Facility, but the release of the next tranche has been delayed owing to the global lender’s hesitancy in completing the ninth review due to various deviations from previously agreed conditionalities by Islamabad.

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