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Thursday, November 30, 2023

Pakistan’s foreign-currency bonds got a B- rating, but with a stable outlook

Fitch Ratings has given Pakistan a B- rating. Identified three areas, wherein if Pakistan works, the rating could get positive in the long run.

Fitch Ratings, the American credit rating agency has assigned Pakistan’s (B-/Stable) proposed foreign-currency bonds a ‘B-‘ rating on Tuesday.

As per Fitch, “the rating is in line with Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘B-‘ with a stable outlook.” Agency affirmed Pakistan’s Long-Term Foreign- and Local-Currency IDRs on 17 August 2020.

The rating on the proposed bonds is sensitive to any changes in Pakistan’s Long-Term Foreign-Currency IDR. The rating sensitivities for the sovereign rating published in the rating action commentary in August 2020.

The agency identified external finances, public finances, and macroeconomic measures as three factors that can impact the credit rating of Pakistan in the future.

Read More: Moody’s terms growth in Pakistan’s Islamic banking as credit positive

The Agency wanted Pakistan to sustain the foreign reserves, and the government has been working on it. Under the Roshan Digital Account, launched on 10th September 2020, the overseas Pakistanis had deposited $671mn by 11th March. The remittances are rising due to “Policy measures undertaken by the Government and SBP to encourage inflows through formal channels”, among other reasons according to the State Bank of Pakistan (SBP)

According to the credit rating agency, for better ratings, the country needs to focus on building revenues through taxes. In this regard, Pakistan has been improving its taxation policy and working on regulating the informal sector of the economy.

Also, recently Pakistan introduced 75 amendments in tax laws including, “People hiding their income will face fine worth 50% of their due tax. Shop owners will be fined Rs5,000 for not displaying tax numbers.” This will improve our Public Finances.

Moreover, with the current agreements with the international lenders like IMF releasing $500 million, World Bank promising $1.2 billion based on future projects and recent ADB approval of a $300 million loan to finance the construction of a 300-megawatt hydropower plant in Pakistan, public spending will be supported.

According to Fitch, Pakistan needs to make continuous improvements in the business environment that contribute to improved medium-term growth and export prospects. In this respect, Pakistan has recently initiated a plan to launch 60 Special Technology Zones to become a part of the 4th industrial revolution of technology.

In an interview with ARY, Chairperson Special Technology Zones Authority said that Pakistan, if resources are utilized well, will be catapulting to the top of the IT world, which is expected to make a revenue of $10 billion in two to three years’ time. STZs will have tax exemptions and other indemnities to promote the industry.

Read More: Remittances and industry backed rupee hits back at dollar

The main factor that could, individually or collectively, lead to negative rating action/downgrade is external Finances Indications of reduced access to external finance leading to financing strains. This is a problem as Pakistan is in a severe debt cycle, with the Debt-to-GDP ratio might reach 87 percent by the end of this year, which is an increase from preceding years.