Fuel crisis credit negative for Pakistan: Moody’s

KARACHI: Moody´s Investors Service warned Pakistan on Monday its credit rating could fall due to ongoing fuel crisis that has aggravated power breakdowns and weakened the country’s prospects to meet reform targets under the IMF bailout program.
“Although the government will increase fuel imports, increased imports are unlikely to solve the deepening fuel crisis and will further strain Pakistan’s (Caa1 stable) budget and balance of payments, a credit negative,” Moody’s said.
The shortages of petroleum products started earlier this month when the cash-starved fuel importers cut imports led to public anger and long queues outside petrol stations.
The government initiated an inquiry into the crisis and sacked four officials, including Abid Saeed, petroleum secretary, his deputy Naeem Malik and Amjad Janjua and managing director of the state-run Pakistan State Oil.
“Other than seeking to increase oil supplies and suspending four senior officials in the Ministry of Oil and Gas, the (Prime Minister Nawaz) Sharif government has yet to offer policy solutions to the mounting fuel crisis,” Moody’s said.
Analysts said the crisis has brought down electricity generation by over 2,000 megawatts, raising the deficit to 7,000 megawatts.
Moody’s said worsening power shortages were exacerbated earlier this month, when the PSO failed to secure additional credit from banks to pay for its imports.
The state-run oil marketing company was unable to collect dues from private-sector electricity generation companies, which in turn were owed payment by government-owned power distribution companies.
“The fuel shortages also reflect the strained finances of state-owned distribution companies and the fuel importer, PSO and are a setback to the sector’s progress on reforms made so far under Pakistan’s financial support program with the IMF,” it added.
The vicious cycle of circular debt once again bogged down energy supply chain in the country as power distributors delay payments to generators who, in turn, face difficulty in clearing dues of fuel suppliers like PSO.
The debt arrears, involving various organisations, has crossed Rs500 billion, which accounts for around two percent of the country’s annual GDP of Rs29.078 trillion, according to a recent IMF estimate.
Moody’s said the clearance of existing arrears will add to the fiscal burden.
“The government’s targeted fiscal deficit of 4.5 percent of GDP in fiscal 2015 from 4.7 percent in fiscal 2014 is already impeded by delays in implementing electricity tariff adjustments and legal challenges related to tax collections,” it added. “Although historically low global oil prices provide some cushion, increased fuel imports, which already comprise 35 percent of the total import bill, will weigh on Pakistan’s trade balance.”
The rating agency said the build-up in energy-related debt is also an obstacle to reform implementation under Pakistan’s program with the IMF.
“Steady progress on meeting structural reforms was a key driver prompting our change of the sovereign’s rating outlook to stable from negative in July 2014,” it added.
“Energy reforms are an integral part of the IMF loan agreement, and to qualify for continued external financial assistance under this program, as well as other funding from the World Bank and Asian Development Bank, Pakistan is required to limit such arrears.”
Pakistan has been broadly on track to achieve reforms prescribed under its Extended Fund Facility (EFF) with the IMF, successfully completing five reviews and meeting most of the benchmarks targets. In December, the IMF approved $1.05 billion worth of two installments under the EFF in recognition of improvements in Pakistan’s economic performance.
The IMF saved the country from possible default in September 2013, by agreeing to lend $6.7 billion over three years.
Moody’s said crippling power shortages are an impediment to economic growth, since they curb industrial production and investment, while imposing budgetary drains. “The Ministry of Finance estimates that power outages have shaved up to two percentage points from Pakistan’s annual gross domestic product annually,” it added.