close
Advertisement
Can't connect right now! retry

add The News to homescreen

tap to bring up your browser menu and select 'Add to homescreen' to pin the The News web app

Got it!

add The News to homescreen

tap to bring up your browser menu and select 'Add to homescreen' to pin the The News web app

Got it!
August 14, 2019

Moody’s says escalating Kashmir tensions may mar Pakistan, India fiscal reforms

Business

August 14, 2019

KARACHI: Ratings agency Moody’s has anticipated possible deviation from fiscal reforms in India and Pakistan due to escalating political tensions between the two biggest south Asian economies, saying lukewarm growth could throw a spanner in their revenue-enhancing measures.

“Both economies are already facing near-term challenges, and a sustained military conflict would risk resulting in weaker growth through a prolonged hit to consumer and business confidence, as well as foreign direct investment,” Moody’s said in a latest report.

“India’s fiscal dilemma between achieving its fiscal consolidation targets and supporting sustainable job creation and investment would be further challenged by a more pronounced slowdown in GDP growth. This is particularly the case given ambitious fiscal 2019 revenue targets that depend on higher GDP growth.”

India last week arbitrary revoked autonomous status to the India-occupied Kashmir. India’s real GDP growth decelerated to 6.8 percent in fiscal 2018, which ended March 2019, the slowest rate in five years. “Economic growth has moderated amid heightened financial stress among rural households and weak job creation that is hampering both urban and rural consumption, as well as still-weak private-sector credit growth constraining business investment. This has been particularly the case in J&K (Jammu and Kashmir).”

Moody’s said J&K has experienced the highest levels of unemployment over the past three years, with an unemployment rate of 15 percent, more than twice the national rate of 6.4 percent.

“J&K accounts for less than 1.0 percent of total Indian GDP, therefore weaker growth in the state would have limited direct implications for the economy as a whole,” it added. “However, prolonged heightened tensions would likely affect investment and growth across the country.”

Moody’s said the move to abrogate Kashmir status might face some objections from India’s Supreme Court, “but if sustained, it risks prompting an escalation in geopolitical and military conflict with Pakistan”.

“While such an escalation is not our baseline, it would be credit negative for both India and Pakistan because weaker economic growth would hamper both governments’ ongoing fiscal consolidation,” it added.

Last year, Moody’s maintained credit profile of Pakistan at B3 negative, which reflected the sovereign’s high external vulnerability, weak debt affordability, and very low global competitiveness. India has Baa2 stable credit rating.

Moody’s further said a sustained scenario of conflict would potentially impair Pakistan’s access to external financing and pressure foreign-exchange reserves, but “we expect that the recently signed IMF (International Monetary Fund) program and other bilateral and multilateral borrowings would provide some external buffers”.

“A sustained flare-up in border tensions with Pakistan would likely further depress near-term economic outcomes,” it added. “Over the longer-term, integration of the northern state could lead to greater economic activity, provided a peaceful resolution is ultimately reached with Pakistan.”

Pakistan’s economy has been slowing, with real GDP growth declining to 3.3 percent in FY2019 from more than 5 percent a year earlier. Exchange-rate depreciation and monetary policy tightening in response to wider current-account deficits and low foreign-exchange reserve adequacy have contributed to the decline through weaker domestic demand.

Moody’s said broadened military conflict would weigh on the effectiveness of revenue-enhancing reforms and the ability of the authorities to meet the IMF’s program targets, “should the macroeconomic environment and growth deteriorate further”.

Pakistan last month entered a $6 billion IMF program that involves a revenue mobilisation strategy and long-term structural policy reforms over the program’s period of three years, as well as primary balance targets. Primary deficit was agreed at 0.6 percent of GDP in the current fiscal year of 2019/20, down from 2.4 percent of GDP in the last fiscal year.

"However, a further and more protracted economic slowdown for both economies would make it difficult for both governments to meet their fiscal consolidation targets,” Moody’s said.

Topstory minus plus

Opinion minus plus

Newspost minus plus

Editorial minus plus

National minus plus

World minus plus

Sports minus plus

Business minus plus

Karachi minus plus

Lahore minus plus

Islamabad minus plus

Peshawar minus plus