Moody’s downgrade

Published June 4, 2022

THE bills have come due for the PTI’s ill-conceived fuel and electricity subsidies and the PML-N’s waffling response to an imminent balance-of-payments crisis.

Within a week, the new government has unloaded a cumulative 40pc hike in fuel prices as well as a 47pc increase in the per unit tariff for electricity. Inflation, already high, will soar as the economy adjusts to the new reality.

Meanwhile, the inordinate delay in the announcement of these price adjustments and the resultant delay in securing an IMF loan has cost Pakistan in the form of a diminished outlook rating.

Moody’s Investor Services, whose risk assessments are closely watched by lenders and influence the interest they charge, has downgraded Pakistan’s outlook to ‘negative’ from an earlier ‘stable’ rating citing the country’s “heightened external vulnerability”, “uncertainty around … ability to secure additional external financing” and “weak institutions and governance strength”.

Both the past and the present government are to blame for this mess.

First, the PTI, for the disastrous policy of subsidising electricity and fuel not just for the poor, but also the rich. It ended up incentivising the consumption of an imported commodity that the country simply could not afford.

Then, the PML-N, which, despite knowing that the subsidies needed to be withdrawn immediately, fought within itself for weeks as ‘senior’ leaders refused to let the government take what proved to be an inevitable decision. The party’s unpreparedness to deal with economic realities rattled capital markets and ultimately resulted in Pakistan’s failure to secure an agreement with the IMF in the recently concluded round of talks in Doha.

Editorial: Cold feet

Throughout this period, the country’s political climate has remained on a boil, with one party willing to go to any lengths to force an early election, and one party (the government) fumbling spectacularly in dealing even-handedly with either the political or the economic challenges it faces. No wonder Moody’s does not see much hope given the existing state of affairs.

The rating agency is reasonable in expecting that the government cannot deliver stability in its short tenure. The latter faces significant challenges in keeping its rainbow coalition of allies intact as the threat of public agitation, led by a resurgent PTI buoyed by widespread anger over inflation, always lurks around the corner.

Editorial: Meeting IMF demands

Since the government has chosen to complete its tenure, however, it is now its responsibility to respond to these challenges in a manner that at least does not worsen Pakistan’s international credit ratings any further if it cannot improve them.

A lot hinges on maintaining social and political stability and securing a lifeline from the IMF, without which many avenues for external financing will remain closed. Failure to clinch an agreement this month can spell further disaster for the economy, the blame for which will fall squarely on the government’s shoulders.

Published in Dawn, June 4th, 2022

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