The decision by international rating agency Moody’s to maintain Pakistan’s long-term credit rating at Caa3, with a stable outlook, is indicative of the country’s weak position in the world’s financial markets due to its cash crunch.
A higher likelihood of default and a higher level of investment risk are indicated by the grade in the context of weak debt affordability. It also considers how Pakistan’s low growth rate and high susceptibility to catastrophic weather events might raise economic and social costs, as well as how high debt service obligations limit the country’s ability to fund important social and infrastructural projects. Due to the liquidity crisis and issues with external vulnerability, international rating agencies have long placed the nation’s economy in the category of “speculative grade,” meaning that there is a very high credit risk. Just a year prior, Moody’s had downgraded Pakistan from Caa2 to Caa3, placing it near the bottom of the riskiest markets, following the IMF’s suspension of funding support because the government had not fulfilled the objectives of the previous Fund programme.
As a result, Pakistan’s foreign exchange reserves fell, raising worries about the nation’s declining capacity to repay its international debt. Even when the IMF decided to give Islamabad a $3 billion short-term loan to help stabilise the economy and avoid default, the agency maintained the sovereign rating at the same level last summer. In the event that a new, larger loan arrangement is not made with the IMF, Moody’s most recent judgement serves as more evidence that the political unpredictability following the February 8 poll, along with default fears, will persist. It states, “After… contentious elections, political risks are high.”
It states that there is a significant deal of uncertainty about the incoming government’s willingness and capacity to join an IMF programme as soon as possible. This is necessary to draw in more funding from bilateral and multilateral partners and lower the chances of default. Furthermore, it asserts that the incoming coalition government’s ability to make decisions will be severely limited because its election mandate might not be strong enough to support the kind of challenging reforms that a new IMF programme is expected to call for. The sovereign’s sources of funding to satisfy its “very high external needs” after the current IMF Stand-By Arrangement expires in a few weeks, however, are “limitedly visible,” according to Moody’s. Until Pakistan enrols in a new plan with the Fund, that worry will persist.
Pakistan’s chances of moving from the high-risk to the investment-grade category, however, would rely on how well the government implements long-lasting structural changes as well as political and policy stability.
Pakistan has managed to build up a modest foreign exchange reserve in recent months, largely due to stringent import and profit repatriation curbs, the present IMF facility, and other multilateral inflows. This indicates that for the current fiscal year, the new setup will probably be able to pay off its remaining foreign debt.