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Fitch Ratings Predicts Drop in Inflation and Interest Costs as Pakistan Prepares for IMF Programme

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Fitch Ratings, in a positive turn of events, has forecasted a significant decrease in inflation and interest costs for Pakistan as the nation prepares to enter a new International Monetary Fund (IMF) programme. The rating agency’s statistical analysis of Pakistan’s economic situation indicates that the inflation rate is projected to remain at a manageable 12% amid the country’s ongoing economic challenges, instilling a sense of optimism for the future.

In a proactive and significant move, the State Bank of Pakistan (SBP) has recently lowered its key interest rate by 150 basis points, marking the first rate reduction in nearly four years. This decisive action aims to stimulate growth in the face of a sharp decline in retail inflation, with the key rate now standing at a reassuring 20.5%. Additionally, recent data revealed that inflation had decreased to a 30-month low of 11.8% in May, further bolstering confidence in the country’s economic management.

Fitch Ratings has underlined that government debt is expected to decrease to a more manageable 68% of GDP by the end of FYE24 due to high inflation and deflator effects, offsetting the escalating domestic interest costs. The agency anticipates a concurrent decline in inflation and interest costs, driven by economic growth and primary surpluses, gradually reducing the government debt-to-GDP ratio. Furthermore, Fitch projected the policy rate for FY25 to be at a reassuring 16%.

The rating agency also pointed out that Pakistan’s “ambitious FY25 budget” has bolstered the country’s chances of securing a bailout agreement with the IMF. Although Fitch expressed reservations about the government’s ability to achieve its fiscal targets, it predicted a decrease in the fiscal deficit even if the proposed budget measures are only partially implemented. This reduction in the fiscal deficit is expected to alleviate external pressures, albeit at the expense of economic growth. Fitch cautioned that stringent policy measures might have a more pronounced dampening effect on growth than anticipated by the government.

Fitch Ratings anticipates that the growth rate in FY25 will hover around 3%, despite some improvements in short-term economic activity indicators. Furthermore, the rating agency pointed out that Pakistan’s external position has shown signs of improvement since the recent election, with the current account deficit expected to narrow to 0.3% of GDP (USD1 billion) in FY24, down from 1.0% in FY23. The agency attributed this improvement to subdued domestic demand leading to reduced imports, coupled with reforms in the exchange rate that have bolstered remittance inflows into the official banking system.

Fitch also expressed optimism about the economic outlook due to robust agricultural exports. The agency noted that Pakistan’s gross reserves, including gold, have increased to USD15.1 billion, equivalent to over two months of external payments, up from USD9.6 billion at the end of FYE23.

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