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December 5, 2019

Moody’s verdict

Editorial

 
December 5, 2019

The government sounds happy after Moody’s verdict on Pakistan’s economic performance. While the international ratings agency kept Pakistan’s debt rated at B3, which is on the lower end of the scale, it has changed the economic outlook from negative to stable. While one can wonder whether it is the approval of ratings agencies or the Pakistan public that the government needs, there is little doubt that government officials will see the change as a sign that their economic approach is working. The improvement has come after a full year in which Pakistan’s economy received a negative prediction during the early period of the PTI. However, pursuing one year of IMF-backed reforms has been enough for Moody’s to change Pakistan’s credit outlook. The country’s balance of payments position has improved, while the currency has also stabilised after depreciation. However, Moody’s continues to warn that the foreign exchange reserves remain low and continue to pose a risk to the country’s economic outlook. For Moody’s, Pakistan’s external vulnerability risk is now lower that it was a year ago, which is seen as a good sign.

Economic Advisor Hafeez Shaikh has issued a statement acknowledging that the upgrade reflected well on the government. Compared to the downgrade a year ago, when Pakistan could only pay two to three months of import bills, the financial position is better. However, Moody’s was concerned about the tough IMF conditions and slowing down of growth a year ago, which are issues that remain unaddressed at the moment. Whether Pakistan’s economy can grow in the financially tightened economic environment is not a question that has a clear answer right now.

For Moody’s the IMF programme has opened up significant multilateral and bilateral funding, which is likely to bode well in the short term, but it warns that the government needs to mobilise private sector resources to sort the situation out properly. It also warns that debt levels have risen due to the currency deprivation, but this is counter balanced by the IMF programme, which will provide liquidity. This has little to say about what would happen in a post-IMF world for the country, which would continue to pose a major trade shortfall, made worse due to the poor economic growth position. This means that Pakistan remains at a risky position, with the only silver lining being that imports have fallen, which is the main driver of the narrowing current account deficit. Moody’s expects exports to pick up due to depreciation, but there is no evidence of this happening right now. The government may be happy to receive Moody’s approval, but there are serious issues that it needs to start addressing.