Citing increased government liquidity and external vulnerability risks, in the aftermath of the devastating floods that hit Pakistan, Moody’s Investor Service on Thursday cut the country’s credit rating downgrading it to Caa1 from B3.
“Debt affordability, a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future. The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs,” the rating agency said in a statement.
The floods that took the lives of at least 1,700 people across Pakistan also severely damaged the country’s infrastructure and caused great loss to the national exchequer.
It further stated that Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) programme will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.
Moody’s said the negative outlook captures risks around Pakistan’s ability to secure required financing to fully meet its needs in the next few years.
“Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures, that would improve the country’s fiscal position and alleviate liquidity stresses.
“The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis. Pakistan’s weak institutions and governance strength add uncertainty around whether the country will maintain a credible policy path that supports further financing,” it said.
Government reaction
Calling out credit rating ‘unilateral’, the Ministry of Finance said the action was taken without prior consultations and meetings with the ministry’s team or the State Bank of Pakistan and strongly felt that the downgrading of Pakistan’s rating was not truly reflective of Pakistan’s macroeconomic conditions.
“Following Moody’s intimation of the rating action, Ministry of Finance held two meetings with the Moody’s team over the past 24 hours, sharing data and information which clearly show a picture contradicting Moody’s rating action,” the ministry said in a statement.
After a regular stock take of the economic and fiscal conditions, Ministry of Finance seeks to inform that government policies over the last few months have helped in fiscal consolidation, it added.
The statement underscored, that the Government of Pakistan has adequate liquidity and financing arrangements to meet its external liabilities.
“Pakistan is currently under the IMF Programme, the continuity of which is based on the confirmation and confidence in country’s ability to maintain the fiscal discipline, debt sustainability and its ability to discharge all its domestic and external liabilities. The country remains committed to the agreements reached under IMF prorgamme,” it said.
It argued that Moody’s “worsening near- and medium-term economic outlook” does not depict the correct picture due to gaps in information available with Moody’s and its use of estimations is not grounded in fundamentals.
“As such, the estimate of economic cost of the floods at $30 billion is premature as the data is still being compiled in collaboration with World Bank and other partners, to ensure transparency and accuracy, and will be available once the figures are firmed up. Thus, the impact on GDP growth rate cannot be fully and accurately assessed at this time and so Moody’s downward revision of GDP growth rate at 0-1% has no solid basis,” the statement added.
“Translating economic losses into fiscal deficit is contested. On the expenditure front, government will largely be involved in public infrastructure rebuilding, and that too, over a number of years. The uptick in urgent current expenditure is being met through re-allocations and re-appropriations of budgeted funds thus mitigating the risk of rising deficit. On the revenue front, the increase in nominal GDP is likely to compensate for any dip in revenues”.
The ministry further stated that during recent meetings with multilaterals, the government has received additional funding commitments from ADB of over $2.5 billion. Similarly, World Bank has also pledged additional funding of around $1.3 billion for infrastructure and other projects in the current financial year. These are in addition to ministry’s financing plan at the start of the financial year.
The ministry said that the overall situation of the country, especially in the post-flood scenario, needs to be seen in the context of the steps taken by the government for relief and recovery and the assistance and commitments by the global community, including multilaterals and bilateral, to help in the rehabilitation and reconstruction phase.
