The recent periodic review of Pakistan’s ratings by Moody’s proves yet again that the key determinant of a polity’s stability is, surprise surprise, political stability. Of course, Moody’s touches upon matters like fiscal consolidation, improved debt affordability, reduced reliance on external financing, and constructive engagement with the IMF, but all of them rely largely on political stability. Arriving at a time when Pakistan meanders through its tortuous transition to a newly elected government, the message could not be more opportune. The Singapore-based ratings agency aptly reemphasizes Pakistan’s stable outlook and even points to a path to improved rating: Cutting risks attached to the government’s liquidity and external vulnerability.
Moody's statement, while nuanced, sends a clear signal that any major debt restructuring having an impact on private-sector creditors would have negative consequences for Pakistan's creditworthiness. It is effectively a warning designed to discourage Pakistan from going down that route. Ratings agencies as a rule communicate in a measured language. It is rare for them to be overly prescriptive, especially in such sensitive matters as sovereign debt restructuring. Moody’s couched warning, therefore, is not to be taken lightly. The new government due to step into office in the coming week or so must also consider that Pakistan did not subject its citizenry to historic economic hardship in the last couple of years for nothing. If the 2022 monsoon floods that drowned a third of the country’s landmass, rendered millions homeless and destroyed crops and food stocks did not warrant a debt moratorium or restructuring, nothing does now. Besides, any such move is sure to drive Pakistan’s already high borrowing costs through the roof, which hardly makes economic sense.
Which brings us to the matter of revenue-raising measures. As Moody's noted, Pakistan's credit rating is constrained by high liquidity and external vulnerability risks, along with weak fiscal strength. Robust revenue-raising measures directly tackle these issues – in addition to signalling political stability. What's more, the benefits of strong revenue raising are multifaceted. Not only can improved revenue help us reduce reliance on external financing, but can also render our debt more affordable and make our balance sheet more attractive to the IMF and other lenders. The drift is that effective revenue-raising measures are undeniably a critical piece of the puzzle for Pakistan to address its economic challenges and enhance its creditworthiness. It could even be seen as a leading indicator of its capacity to manage those challenges effectively.
None of this is to say instituting those measures is going to be easy. Quite the contrary, especially given the makeup of the emerging political coalition headed into power. For example, while the lead partner PML-N is likely to be keen on fresh taxation and privatization, junior partner PPP is likely to oppose such measures based on political expediency couched as ideology. There is no telling how hard the firebrand former prime minister Imran Khan, left out in the cold following the February 8 general election, is going to try to win those points. For example, every privatization deal potentially represents thousands of public-sector jobs lost, and there are a lot of brownie points to be won by opposing privatization.
The one thing going for Pakistan at this point is a policy continuity that has held its course from the PDM government through the caretaker setup. Given that the new government is likely to largely comprise the same political parties, it should not be too much to expect that policy direction to continue into the new government. We also know that the IMF’s SBA was designed from the beginning as a ramp into a new longer-term program following the political transition. The challenge, then, is more political than economic. In other words, the key to Pakistan’s success is held more by the political stalwarts of the new disposition, rather than the nominal economic managers. Moody’s duly takes this into account and so should the political leadership of the country. Here’s hoping they realize sooner rather than later that jostling for credit can wait until better times but the task of putting Pakistan’s economy on an even keel cannot.