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