A new report issued by Moody’s Investors Service has upgraded sovereign credit rating of Pakistan from Caa1 to B3, reversing its earlier decision of July 13, 2012 when it had downgraded credit rating to Caa1 on July 13, 2012 due to poor standing of the economy which was subject to very high credit risk. The credit rating agency believes that financial mismanagement, structural inflationary pressures and domestic political uncertainties are causing external vulnerabilities and debt sustainability. However, it has now assigned a provisional rating of (P) B3 to the global bond offered by Pakistan and kept the economic outlook stable. The agency says that Pakistan’s B3 rating reflects moderate economic strength with a supply-constrained economy that has been resistant to the structural changes. It also says that despite the large scale of the economy, the per-capita income in the country is relatively very low but implementation of the China-Pakistan Economic Corridor will help improve power generation and infrastructure. The government has gained significant traction on reforms under the International Monetary Fund’s programme, which emphasizes on deficit reduction, resolving energy sector constraints and the privatisation of state-owned enterprises. The agency also observes several other factors that drive sovereign credit rating, including low fiscal strength and high susceptibility to event risk.
The agency says that key fiscal and external credit metrics are weak and are compounded by the country’s narrow tax base, low savings and shallow capital market, hindering stable financing of budget deficits, but the government is trying to draw out maturity of debt, hoping that it would reduce gross financing needs. The agency says that the government debt rollover risk has been reduced by sizeable recourse to bank lending at home and by a debt structure, adding that the banks in the country are vulnerable to economic risks and political shocks despite stable financial health and management. The report says that the stable outlook of the economy represents its expectation of balanced upside and downside risks and that the support from multilateral and bilateral lenders has improved foreign exchange reserve and progress in ongoing reform program.
The agency though sees deeply entrenched weaknesses in the power sector as a bottleneck to the economic growth; the overall security situation is one of the biggest challenges for the government. The latest incidents of terrorism show that the terrorists still have the ability to strike back at any place of the country. The basic need to contain terrorism is to stop funding of terrorist outfits from India and ‘brotherly’ Arab countries.
