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Moody’s expresses fears about continuity of policies

Updated August 02, 2017

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Supporters of PML-N gesture during rally to condemn the dismissal of their leader Nawaz Sharif in Lahore, Friday.— AP
Supporters of PML-N gesture during rally to condemn the dismissal of their leader Nawaz Sharif in Lahore, Friday.— AP

ISLAMABAD: The New York-based credit rating agency Moody’s on Tuesday expressed fears that Nawaz Sharif’s disqualification as a member of parliament in the Panama Papers case could pose risks to continuity of policies in Pakistan and might impact adversely on its rating.

“If heightened political uncertainty and strife among the various branches of government disrupt the administration’s economic and fiscal agenda, macroeconomic stability and the government’s access to external finance could be impaired, weighing on Pakistan’s credit profile,” the agency said.

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Investigations into the financial affairs of Nawaz Sharif and his family followed the 2015 publication of Panama Papers, which disclosed his children’s vast and previously unreported wealth. The Supreme Court’s ruling in the case included an instruction for the National Accountability Bureau to initiate further investigations in the case.

“High domestic political risk [is] embedded in Pakistan’s credit profile,” said Moody’s and explained that the probability of political events that could affect sovereign credit profile was high and that such events would have a large impact on policymaking and thereby on the economy and the government’s access to finance.

Implementation of CPEC likely to be slow, says rating agency

Pakistan’s politics has long been ‘characterised’ by military coups and strife between the executive, judiciary and military. The persistence of heightened political risk has weakened government effectiveness and its control over corruption.

Following the country’s first democratic transfer of power in 2013, when his party secured an absolute electoral majority, it appeared that Mr Sharif might become the first civilian prime minister in the country’s history to complete a full five-year term.

“His ouster now could trigger another period of political instability, undermining Pakistan’s ability to address pressing domestic economic challenges, bolster investor confidence and attract external financial support from official creditors and donors,” Moody’s said.

Talking about uncertainty regarding policy continuity beyond Mr Sharif’s immediate succession, the rating agency said some political continuity would be maintained in the near term as Mr Sharif had announced that his brother Shahbaz would replace him as prime minister and standard bearer of the Pakistan Muslim League-Nawaz.

Shahbaz Sharif has been serving as the chief minister of Punjab and has overseen several high-profile development projects. Prior to becoming prime minister he must step down as chief minister and get elected to the National Assembly on the seat vacated by his brother. In the meantime, Shahid Khaqan Abbasi will serve as the prime minister.

Given the PML-N’s strong support in Punjab and Shahbaz’s popularity as chief minister, his victory in the by-election appears highly likely.

However, with the next general election due by August next year, the change in PML-N leadership and the ongoing investigations into the financial affairs of the Sharif family could disrupt the policymaking process and economic reforms.

“Credit implications depend on impact on government reforms [and] access to external finance. We expect domestic political risk to continue to constrain Pakistan’s credit profile in the near and medium term, due to both recent events and the country’s longstanding history of domestic security challenges, disruptive politics and military coups.

“The extent to which these events detract from economic and fiscal policymaking, and reduce government effectiveness in general, will ultimately determine their impact on Pakistan’s credit profile. Under Nawaz Sharif’s leadership, in September 2016, Pakistan completed a three-year International Monetary Fund [IMF] Extended Fund Facility programme that helped to stabilise the economy,” said the US-based agency.

“Through its reforms, the government reduced the fiscal deficit, introduced more rigorous inflation management, and rebuilt foreign exchange reserves. More recently, fiscal consolidation has slowed, reserves have declined anew, and external pressures have started to build. “Continued government commitment to policies that preserve macroeconomic stability gains and advance fiscal consolidation would limit future widening of the twin deficits, supporting Pakistan’s creditworthiness. Conversely, slippage from such commitments would exert negative pressure on the credit profile.”

In addition to the IMF programme, Nawaz Sharif oversaw a major expansion of Pakistan’s economic relationship with China through the launch of the China-Pakistan Economic Corridor (CPEC) project in 2015.

The CPEC is a large package of Chinese investment projects with the potential to transform Pakistan’s economy by relieving supply-side constraints to growth through investment in power generation and transport infrastructure. If implemented as planned, CPEC would lift Pakistan’s potential GDP growth significantly and catalyse higher private-sector investments and exports.

“However, security-related issues and Pakistan’s weak track record of public project implementation suggest that the pace of execution will be relatively slow. Moving forward, continued support for the CPEC project across all branches of government will be critical to its success and full implementation,” said Moody’s.

Published in Dawn, August 2nd, 2017