Inflation in Pakistan is skyrocketing and is expected to hit 23 per cent in the current fiscal year, while economic growth is slowing down. The country has been further hit by a $40 billion loss due to floods that wreaked havoc across the country and hit production. As different factors batter the economy of India’s neighbour, ratings agency Fitch has downgraded the country to ‘CCC+’ rating from ‘B-’.
What do these ratings indicate?
This means that from a country which was considered capable of repaying its debt despite some risk of defaut, Pakistan has been placed on the list of countries which is highly likely to miss out on repayment of loans. For the decision, Fitch cites a severe loss of liquidity caused by floods among other factors, along with a possibility of the country making policies that undermine its bailout programme with IMF. Its forex reserves are also under pressure as $21 billion in public debt needs to be repaid, while funding needs are high because of post-flood reconstruction.
Concerns over Imran Khan’s push
Apart from requirement for debt relief and worsening fiscal conditions, political instability caused by Imran Khan’s pressure on the government has also been cited by Fitch as a reason for its decision. Amidst these headwinds, the inclusion in the grey list of FATF that flags Pakistan over terror funding, further limits Pakistan’s ability to access loans and financial support. It has also been highlighted by US President Joe Biden, when he called Pakistan a dangerous place with nuclear weapons without cohesion.
FATF might provide respite
But further instability caused by Pakistan’s dismal economic condition, can lead to deterioration of its political situation. This is why the FATF is reportedly considering dropping Pakistan from the FATF grey list, so that it can raise funding from other countries to rebuild the country and regain financial stability. By June, Pakistan had fulfilled most of the requirements laid out by the FATF for it to tackle terror funding back in 2018, and only some of those targets are yet to be achieved.
