FeaturedNationalVOLUME 18 ISSUE # 16

Downgraded life

International financial institutions continue to degrade Pakistan’s rating one after another. They forecast that the country’s default risk will not minimize even after securing the IMF package. Pakistan has faced a difficult situation for decades and it is hoped its credit rating will improve and it would never default, but high prices have already downgraded life and bankrupted the common people.

Inflation has reached the highest level in the country’s history and there are no prospects of relief for the common people anytime soon. The finance ministry forecast that inflation would remain high in the coming months before easing out gradually. It expected that inflation would remain around 28 to 30pc in the coming months. The key reasons are uncertain political and economic environment, pass through of currency depreciation, recent rise in energy prices and increase in administered prices, it noted. The country suffered an all-time high inflation of 31.6pc in February. It is feared that inflation will outpace all projections after recent hikes in taxes, fuel prices and power and gas tariffs.

The country is also facing serious challenges on the international front. An international rating agency downgraded its credit rating just two notches above default. Moody’s Investors Service has downgraded Pakistan’s local and foreign currency credit ratings to Caa3 from Caa1 in the wake of the drop in its foreign exchange reserves and rise in risk of default on foreign debt repayment. “The decision to downgrade the ratings is driven by the assessment that Pakistan’s increasingly fragile liquidity and external position significantly raises default risks to a level consistent with a Caa3 rating,” it said.

It observed that the country’s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term. Although the government is implementing some tax measures to meet the conditions of the IMF programme and a disbursement by the IMF may help to cover the country’s immediate needs, “weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments”. The stable outlook reflects Moody’s assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks. “Significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, would reduce default risk potentially to a level consistent with a higher rating.”

However, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default. Moreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan’s sources of financing for its sizable external payments needs, the report observed.

Earlier, a senior economist with Moody’s Analytics said inflation in Pakistan could average 33pc in the first half of 2023 before trending lower, and a bailout from the IMF alone is unlikely to put the economy back on track. “Our view is that an IMF bailout alone isn’t going to be enough to get the economy back on track. What the economy really needs is persistent and sound economic management,” senior economist Katrina Ell said. “There’s still an inevitably tough journey ahead. We’re expecting fiscal and monetary austerity to continue well into 2024. Even though the economy is in a deep recession, inflation is incredibly high as (result of) part of the latest bailout conditions. So, what we’re expecting is that through the first half of this year, inflation is going to average about 33pc and then might trend a little bit lower after that,” she added.

Low-income households could remain under extreme pressure as a result of high inflation on account of being disproportionately exposed to non-discretionary items. Food prices are high and they can’t avoid paying for that, so we’re going to see higher poverty rates as well feed through,” the economist feared. She said Pakistan had not had a great track record when it comes to IMF bailouts, so infusing additional funds alone may prove to be of little use. “If we’re going to see any improvement, it’s going to be very gradual. There’s just no overnight fix. The weaker rupee, which is plumbing record lows, is adding to imported inflation while domestically high energy costs on the back of tariff increases, and still elevated food prices are likely to keep inflation high,” she observed.

The Fitch Ratings agency also downgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC-’, from ‘CCC+’ due to worsening liquidity, political volatility and decline of foreign-exchange reserves to critically low levels. One of the three major global rating agencies, Fitch said it did not typically assign outlooks to sovereigns with a rating of ‘CCC+’ or below. In a note defining its action, Fitch explained that the downgrading reflects further sharp deterioration in external liquidity and funding conditions and the decline of foreign exchange reserves to critically low levels. “Default or debt restructuring is an increasingly real possibility, in our view,” it noted.

Many experts say Pakistan is unlikely to default and they have solid reasons but the challenges will persist. It is high time the country took measures to put the economy on the path to permanent progress.