ISLAMABAD: The New York-based Moody’s rating agency on Thursday expressed concern over Pakistan’s falling reserves and rising debt. The long-term outlook remains “robust”, though, due to improved power supply and infrastructure and better security.

The PTI government’s promises for institutional reforms are credit positive, “if effectively implemented,” the rating agency said in its annual credit analysis for Pakistan.

It reaffirmed the country’s rating at B3 negative, which “reflects the sovereign’s high external vulnerability, weak debt affordability, and very low global competitiveness.”

Debt stock to hit 76pc of GDP by 2020, rising by 4 percentage points from present level of 72pc

The biggest risk the rating agency sees is rising debt amid falling reserves. “While Pakistan’s public external debt repayments are modest, low reserve adequacy threatens the ability of the government to finance the balance of payments deficit and roll over external debt at affordable costs,” the agency said. It expects Pakistan’s total debt to reach 76 per cent of GDP by 2020. At present this debt stock stands at 72pc of GDP, which is “higher than the 58pc median for B-rated sovereigns”.

The level of external debt is described as “moderate but rising” and it is threatened by the low level of foreign exchange reserves, the report said. Reserve cover is below 2 months of imports, where the minimum adequacy level is usually considered to be three months, according to recommendations of the International Monetary Fund.

The other threat to debt sustainability identified in the report is fiscal. “The government’s narrow revenue base restricts fiscal flexibility and weighs on debt affordability, while its debt burden has increased in recent years.

“The moderate but rising level of external government debt also exposes the country’s finances to sharp currency depreciations” the report warns, adding that at least part of the increase in debt stock is due to currency depreciation.

The economy is expected to continue slowing this fiscal year. “Moody’s expects real GDP growth in Pakistan to slow to 4.3-4.7pc in fiscal 2019 (ending June 2019) and fiscal 2020 from 5.8pc in fiscal 2018 in part due to policy measures taken to address the external imbalance.”

The State Bank said in its latest monetary policy statement that Pakistan’s growth rate will undergo a “notable moderation” this year, to come in “slightly above 4.0pc”.

The report sees an upside in the inflow of Chinese investments under CPEC, “which are already helping growth” and can further improve the country’s growth potential. It also points to improving institutional strength, particularly “central bank autonomy and monetary policy effectiveness.”

However, the reforms will be challenging for any government to navigate because of the country’s large bureaucracy and complex federal-provincial politics and administrative arrangements”.

Published in Dawn, December 14th, 2018