The beleaguered Pakistani economy faces substantial credit risks with "critically low levels” of foreign exchange reserves, New York-based global ratings agency Fitch said warning that a default is a "real possibility."
The downgrade reflected a sharp deterioration in external liquidity and funding conditions, along with decline of foreign exchange (FX) reserves to “critically low levels," Fitch said.
“Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing and earlier FX intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place.
“We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap,” the agency said.
Fitch said it expects Pakistan to successfully conclude the ninth review of the International Monetary Fund (IMF) programme, and the downgrade is a reflection of the large risks to continued programme preformance and funding, in the run-up to this year's elections.