Fitch sounds the alarm
International ratings agency Fitch has indeed sounded a very serious alarm for countries like Pakistan by warning that our credit rating could be impacted by an expected dip in remittances, which are going to offset gains from lower oil prices in the second half of 2020. Even though just recently Pakistan enjoyed record high remittances in the months of June and July, the agency’s warning does make sense because a lot of expatriate Pakistanis have lost jobs in the US, Europe as well as Gulf countries. This trend will soon begin to exert downward pressure on reserves as well as growth, which would not take long to affect the country’s sovereign rating.
And since ratings accorded by agencies just like Fitch are exactly where foreign investors take their cue from, should the squeeze in remittances really translate into a downgrade sometime down the road our credit markets could dry up rather quickly. That of course would also turn majority sentiment at the local equity market which has just achieved the rare feat of becoming the best market in Asia for the second time. To make matters worse this is not one of those things that governments can control with policy or any manner of legislation. And the way the coronavirus has jolted the global economy it is not surprising at all that Pakistanis have lost jobs all over the world.
What the government can do, however, is start working on what to do should something like this happen and the economy slows down so much that some manner of fiscal stimulus is required. A recovering economy like Pakistan’s is especially vulnerable to downside shocks; and the situation is made much worse if the shocks are exogenous. The government must also get the IMF program back on track as soon as possible. The Pakistani economy has only just begun to claw its way out of a complete fall and the last thing it needs right now is another Balance of Payments (BoP) crisis. Even if the government has no control over employment patterns abroad, especially at the onset of a steep global recession, it can still see what is happening and just what to expect. Therefore it must do whatever is in its power to prepare for the worst. Unfortunately this warning has come just when the welcome uptick in exports has also subsided. With both exports and remittances under pressure, it is only a matter of time before the trauma begins to show in the real economy.