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Moody’s downgrade

Published Jul 15, 2012 12:05am


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THE downgrade of Pakistan’s sovereign creditworthiness was neither unexpected, nor will it affect the country’s economic fortunes (or rather misfortunes?) At worst, it may have a psychological impact on the markets, which are already edgy on account of the same reasons that have led Moody’s to demote Pakistan’s bond ratings. The country’s economic outlook remains negative, and it is unlikely to change in the short to medium term unless we put our house in order. The key drivers debilitating the country’s economy include its eroding capacity to finance its budget owing to its inability to raise domestic tax revenues or to repay its foreign loans because of drying foreign official and private inflows and a rising trade deficit.

Needless to say that its political problems are keeping the coalition government’s focus away from taking tough policy decisions to improve business confidence and addressing structural weaknesses, such as addressing growing energy shortages and increasing domestic revenues. The downgrade of sovereign creditworthiness should sound a warning to the country’s policymakers. The government has already defaulted on its (domestic) sovereign obligations to the IPPs only a few weeks ago. And the possibility of Pakistan defaulting on its foreign debt repayments over the next couple of years cannot be ruled out with the large $6.3bn in principal and interest falling due because of the IMF between 2013 and 2015. With foreign private capital moving into safer assets due to the eurozone debt crisis, Islamabad can avoid a repeat of the 2008 crisis only with the help of official bilateral and multilateral creditors and donors like the IMF and the World Bank. While the US has promised to resume disbursement of suspended Coalition Support Funds of $1.2bn following the reopening of Nato supply routes, that is not enough to resolve our medium- to long-term balance of payment woes. The government will ultimately have to go to the IMF for another loan. This time it may have to accept even tougher conditions for the Fund’s help. And those conditions will not be easy to implement in the absence of a stable domestic political environment.

Comments (8) Closed

gulshan Jul 15, 2012 03:54pm
Islamic Republic Of Pakistan........Zindabad, Zindabad, Zindabad.
akram Jul 15, 2012 08:08pm
Coalition governments like Pakistan and india for that matter, find it difficult to make decisions, what is left of this PPP term its unlikely to be able to do much. The low Tax to GDP ratio has caused Pakistan much heartache over the years, it has to rise but it will take someone with a lot of political courage to force the issue. The 2 established parties PPP and PML seem incapable of making this type of decision in the national interest, they are more interested in self/party interests. Let us hope Imran can force this issue amongst others, pride in self reliance comes after taking care of one's responsibilities first.
S.A. Khan Jul 16, 2012 12:15am
The Government does not appear to be interested in implementing good economic policies. Loans, foreign or domestic, can only buy you some time provided you use the time to take substantive economic and financial steps with great urgency. The politics in the country is not a distraction; it is what this govenment really wants to do, and most of the political and legal/judicial problems are of its own making. The calculation appears to be: let us postpone the economic disaster as long as we can and focus on making tons of money in the meantime.
Cyrus Howell Jul 15, 2012 01:29pm
That about sums things up. Politicians hate tough decisions. They will be damned if they do and damned if they don't make them. No doubt that fiscal genius Imran K. can jump right in and solve the problems. He couldn't do any worse. If he could fire the entire Congress he would be off to a running start. Pray for a miracle but don't expect one.
Aslam Jul 15, 2012 03:37pm
Unlike Greece, a defaulting Pakistan is as important to the world economy as a dead leaf in autumn.
mohammad Jul 16, 2012 02:42am
we the people of PAKISTAN need to rise to the occasion and voluntarily finance our country's institutions to get it out of crisis. WE HAVE THE POTENTIAL AND WILL.... INSHA ALLAH.fear ALLAH and volunteer in tax payment.
Shahid Jul 16, 2012 04:45am
tough legislation against corruption in Pakistan is needed & then strict implementation of it. Any govt officials or politicians who do corruption should be punished. People of Pakistan should also be resist corruption at all levels if we want to change our fate.
ss verma Jul 15, 2012 07:33am
2012: Greece 2013:Pakistan