Risk of loan default on Pakistan deepens, Fitch downgrades rating; issued this warning

Another bad news for the beleaguered Pakistani economy. After a sharp decline in foreign exchange reserves, Pakistan is also becoming unable to repay its loans. Its economy faces substantial credit risk. Meanwhile, New York-based global rating agency Fitch has warned that Pakistan could soon become a loan defaulter if the situation does not improve.

In its report, Fitch said that loan default is a real possibility. Fitch downgraded Pakistan's long-term foreign currency issuer default rating (IDR) to 'CCC-' from 'CCC+'. This means that its liquidity and policy risks have further deteriorated.

Pakistan's crisis deepens

Fitch said the downgrade reflects a sharp deterioration in external liquidity and funding conditions. Pakistan's foreign exchange reserves have seen a major decline in the recent past. Fitch has said in its report that the situation does not look very pleasant, especially in the fourth quarter of 2022, given the falling reserves, large-scale decline, current account deficit (CAD), external debt, and foreign reserves of the Central Bank of Pakistan. Quarterly.

Risk of becoming a loan defaulter

The agency said that Pakistan's foreign exchange reserves are expected to remain at a low level. However, due to the anticipated currency inflows and the recent removal of the exchange rate cap, there is scope for improvement in the remaining months of FY23. Fitch said it expected Pakistan to complete the ninth review of the International Monetary Fund (IMF) program.

Pakistan on the brink of disaster

Pakistan has been grappling with instability in recent days stemming from an economic crisis, last summer's devastating floods, and an increase in terrorist attacks across the country. A significant USD 1.2 billion portion of the 2019 bailout was stuck since December last year. IMF urged Pakistan to raise more cash.

Pakistan held ten days of intense talks with the IMF delegation in Islamabad, but could not reach an agreement. The IMF and the Pakistan government resumed talks virtually on Monday, hoping to reach an agreement soon. Will give impetus to the country's sick economy.

Pakistan's foreign exchange reserves stood at around US$2.9 billion as of February 3, according to estimates by the country's central bank, which was not enough even for three weeks of imports.

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