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Moody’s downgrade

July 15, 2012

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.