Unchanged rating

Published February 29, 2024

INTERNATIONAL ratings agency Moody’s decision to keep Pakistan’s long-term credit rating unchanged at Caa3, with stable outlook, is reflective of the poor standing of a cash-strapped nation in global financial markets.

The rating indicates a higher probability of default and a greater degree of investment risks amid weak debt affordability. It also takes into account Pakistan’s low growth rate and high exposure to extreme weather events, which can increase economic and social costs, with high debt-servicing requirements reducing the fiscal flexibility to undertake key expenditures on infrastructure and social initiatives.

Global rating agencies have long ranked the country among ‘speculative grade’ economies, with very high credit risk owing to the liquidity crisis and external vulnerability challenges. A year ago, Moody’s had downgraded Pakistan from Caa2 to Caa3, relegating it to almost the bottom of the riskiest markets, shortly after the IMF suspended its funding support due to the authorities’ failure to meet the goals of the previous Fund programme.

That had seen Pakistan’s foreign exchange reserves plunge and had raised concerns over the country’s weakening ability to pay its foreign debt. The agency kept the sovereign rating unchanged last summer, even after the IMF agreed to provide a short-term $3bn loan to help Islamabad stabilise the economy and avert default.

Moody’s latest decision once again underscores that the fears of default, exacerbated by political uncertainty in the aftermath of the Feb 8 poll, will continue, unless a new, larger loan agreement is reached with the IMF. “Political risks are high,” it says, “following … controversial elections.”

It says that there is a great deal of uncertainty regarding the new government’s inclination and ability to quickly enter a new IMF programme, which is needed to attract additional financing from other multilateral and bilateral partners in order to reduce default risks.

It also maintains that the forthcoming coalition government’s decision-making capacity will be severely constrained as its electoral mandate may not be sufficiently strong to pursue difficult reforms that will likely be required by a new IMF programme.

Thanks to the current IMF facility and some other multilateral inflows, as well as strict controls on imports and profit repatriation in the last several months, Pakistan has successfully accumulated a small stock of foreign exchange. That means the new set-up will likely meet its remaining external debt obligations for the present fiscal.

However, as Moody’s has said, there is “limited visibility” regarding the sovereign’s sources of financing to meet its “very high external needs” after the current IMF Stand-By Arrangement ends in a few weeks. That concern will remain until Pakistan enters a new programme with the Fund.

However, the likelihood of Pakistan graduating from high-risk to investment-grade category will depend on the government’s undertaking durable structural reforms, and political and policy stability.

Published in Dawn, February 29th, 2024

Opinion

Rule by law

Rule by law

‘The rule of law’ is being weaponised, taking on whatever meaning that fits the political objectives of those invoking it.

Editorial

Isfahan strikes
Updated 20 Apr, 2024

Isfahan strikes

True de-escalation means Israel must start behaving like a normal state, not a rogue nation that threatens the entire region.
President’s speech
20 Apr, 2024

President’s speech

PRESIDENT Asif Ali Zardari seems to have managed to hit all the right notes in his address to the joint sitting of...
Karachi terror
20 Apr, 2024

Karachi terror

IS urban terrorism returning to Karachi? Yesterday’s deplorable suicide bombing attack on a van carrying five...
X post facto
Updated 19 Apr, 2024

X post facto

Our decision-makers should realise the harm they are causing.
Insufficient inquiry
19 Apr, 2024

Insufficient inquiry

UNLESS the state is honest about the mistakes its functionaries have made, we will be doomed to repeat our follies....
Melting glaciers
19 Apr, 2024

Melting glaciers

AFTER several rain-related deaths in KP in recent days, the Provincial Disaster Management Authority has sprung into...