IN what is likely to be the first in a string of ratings actions, Moody’s has downgraded the outlook on Pakistan’s credit rating from stable to negative.

The global rating agency gives “heightened external vulnerability risk” as the main reason, going on to say that “[f]oreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months”.

The situation makes it difficult for the government to raise more foreign exchange through international bonds, which increases “government liquidity risks”.

Although the agency reaffirmed Pakistan’s rating of B3 in light of the “robust growth potential” of the economy, “supported by improvements in energy supply and physical infrastructure”, it is now acting on the other side of the coin, which is “low revenue generation capacity” and “fragile external payments position”.

For years now we have been told by the government to ignore the growing gaps on the external side and focus only on the revival of growth and investment, the new power generation enhancements and CPEC. Few bought this story in its entirety, but now it seems the weaknesses are catching up with growing ferocity.

The latest figures for the external account, released the same day Moody’s announced its downgrade, show the current account deficit grew by 43 per cent in the first 11 months of the fiscal year.

The growth rate may be slowing down due to a rebound under way in exports, but on the same day Moody’s reiterated what all other independent observers of the economy have been saying all along: “While Moody’s assumes continued strong growth in exports, this will not be enough to narrow the trade gap.”

Something needs to change drastically. This is especially true considering large repayments obligations are looming, and many CPEC-related payment obligations are starting to kick in.

Once again, on the same day as the data release and rating action by Moody’s, the lead representative of all 21 private power producers in Pakistan told the Senate that due to Rs16 billion in unpaid bills to the Sahiwal coal project, Chinese investors were becoming jittery about Pakistan, and “the consortiums are falling apart” as a result.

This is precisely what those who had been warning about the associated costs of these CPEC power projects were referring to all along, and now that these projects have begun commercial operations, the costs are only going to ramp up.

These include payments for power purchase, as well as debt service and repatriation of profits, both of which hit the fiscal and external accounts that are the principal weaknesses in the macroeconomic framework.

The challenges are now set to mount rapidly, and there is a growing urgency for this state of transition to pass quickly and a new government to establish itself. Time is of the essence.

Published in Dawn, June 22nd, 2018