KARACHI, May 15: Pakistan’s deteriorating political situation prevailing since the imposition of emergency finally downgraded its economic rating by an international agency, making it more difficult for the country to meet its deficits.
The country, trapped by all kinds of economic deficits, would find it hard to borrow dollars from the international market or multilateral donors after a negative outlook of Pakistan’s economy by Standard and Poor’s.
Standard & Poor’s Ratings Services said on Thursday that it lowered its long-term foreign currency debt rating on Pakistan to ‘B’ from ‘B+’, and its long-term local currency rating to ‘BB-’ from ‘BB’.
At the same time, the rating agency affirmed ‘B’ short-term rating on the sovereign.
“The outlook is negative. In tandem with the lowering of sovereign credit rating, we are also lowering the Transfer and Convertibility Assessment rating on Pakistan to ‘BB-’ from ‘BB’,” said the S&P.
Analysts said the detailed report of S&P has made it more difficult for Pakistan to raise foreign exchange from the international market and it would also make an impact on foreign investment in the country.
“The cost of borrowing will certainly increase as risk profile of the country has gone up with this report,” said Faraz Farooq, researcher at the JS Company.
He said Pakistan would have to pay higher interest rates on its sovereign bonds, like Sukuk, since the risk is now high.
With huge trade deficit of over $16 billion in last 10 months, the country needs massive borrowing to meet the current account deficit plus speedy rising of fiscal deficits.
The just resigned Finance Minister said recently that the country needed immediate borrowing of $3 billion to meet the deficits.
In a sharp reversal of years of consolidation, the general government fiscal deficit (excluding grants) is set to reach about eight per cent of the GDP in fiscal 2008 (ending June 2008), well above the four per cent official target and the 3.7 per cent average for the past five years, said the S&P report.
With the disintegration of the recently installed cabinet, fiscal adjustments planned by the administration to stem the marked deterioration would remain in the need. Significant expenditure overruns due to rising subsidy and interest costs, and defence and capital spending are exacerbated by the apparent atrophy of an already weak revenue effort.
For the first half of fiscal 2008, total revenues rose by 1.8 per cent year-on-year.
“If this trend persists throughout the year, Pakistan’s revenue-to-GDP ratio would decline to about 14 per cent from 15.3 per cent in 2007,” said the rating agency.
Fiscal shortfalls of this magnitude, in conjunction with adverse changes in the financing mix towards short-term higher-cost domestic borrowing and commercial external borrowing, jeopardise Pakistan’s favourable debt dynamics, it added.
With a still substantial public leverage at an estimated 59 per cent of the GDP, Pakistan’s debt-to-revenue ratio could rise to about 400 per cent against the median 171 per cent for similarly rated countries.
Similarly, Pakistan’s once favourable and improving external liquidity is suffering a serious reversal, highlighted by the recent sharp fall in foreign reserves.
A rapid rise in the oil import bill and stagnant exports are yielding record current account deficits, projected to reach 7.3 per cent of the GDP for fiscal 2008.
“With the underlying negative political setting partly causing as well as prolonging the fiscal and external deterioration, an improvement in the rating or outlook is not envisaged unless a fundamental shift occurs,” said the report.
The report said the lowering of the Transfer and Convertibility Assessment rating assumes that current exchange controls would not impair the debt service payment mechanism and ability for the country’s corporate sector.
