Grade B

Amidst all the negative press in recent weeks about Pakistan’s macroeconomic stability, the credit rating agency Standard & Poor’s has delivered some much needed reprieve. S&P has maintained Pakistan’s credit rating at ‘B’, which is still considered ‘highly speculative’, but it is the refusal to degrade the economy that will be latched on by the government. The finance ministry has already issued a statement noting that S&P has confirmed that the financial alarm being raised in certain quarters has no basis in reality. Questions were being asked about whether high levels of debt and the growing trade deficit were likely to push the country back to the begging bowl. The situation with respect to falling foreign exchange reserves is well known. Very few have been able to state with certainly whether a financial crisis is on the cards. According to S&P, Pakistan should be able to service its current debts, but it has revised downwards its expectation for better fiscal and external account performance. There is certainly cause for concern as the country’s deficits are set to increase on a monthly basis.

Without solving the growing trade deficit, the chances of a financial crisis within the next five years could very much be possible. The ratings of external agencies should always be taken with a pitch of salt. Pakistan’s rating itself is not high enough for there to be no reason to be alarmed. Being rated B rarely means a safe investment – as is visible from the many caveats that S&P has added to its report on Pakistan. Matters of political stability, trade deficit, the security situation and foreign reserves are all pointed out as factors to weigh. This means that any major shakeup could cause a problem. Many will be satisfied that there is no crisis set to dawn upon us – but it would be better to rely on an analysis of local data to see what the current financial situation means for those who live in Pakistan. There are major issues that are internal to the country and which continue to need redressing. The recent decision to increase import tariffs has already suggested that the government has begun to take emergency measures to ensure the trade deficit goes down. The S&P rating will ease some concerns but this is not a reason for the government to pat itself on the back.     It has serious concerns to address before we can be sure that Pakistan is out of the financial doldrums.