Worsening economic outlook
One of the three top credit rating agencies, Moody’s Investors services has downgraded the outlook on Pakistan’s credit rating to negative from stable and affirmed the B 3 local and foreign currency long term issuer and unsecured debt rating. The decision to change the outlook from stable to negative is driven by Pakistan’s heightened external vulnerability risks. The analysis that depicts gloomy picture of the economy was released few days ago. Moody stated, “Foreign exchange reserves have fallen to low levels, and absent significant capital inflows, will not be replenished over the next 12-18 months.”It adds that low reserves adequacy threatens continued access to external financing at moderate cost.
Surprisingly, it was the same Moody, Investors Service which in its annual credit analysis, released in May 2018, confirmed a stable economic outlook though with b 3 rating. One is at loss to understand that which of the two consecutive assessments of Pakistan’s economy is correct? In its previous analysis it vaguely said, “Strong growth performance, fiscal deficit reduction and improved inflation dynamics underpin the Government of Pakistan’s B 3 rating with stable outlook.”But quite simultaneously, it argued that the government’s narrow revenue base weighs on debt affordability. It also pointed out that exports and home remittances inflows have slowed down; import of capital goods have risen, resulting in renewed pressure on external account. It did not substantiate the nature of so called robust economic growth as to whether it is income and production led or it is non-productive expenditure and consumption driven
On the contrary, another big credit rating agency. Fitch was more candid about the deteriorated health of Pakistan’s economy. In its assessment, released on 25th January 2018, Fitch had revised the outlook on Pakistan rating to negative. The credit rating agency had said that Pakistan’s long term foreign and local currency issuers default rating had become negative from stable and had affirmed B rating for both. Fitch said that it revised the outlook because since the completion of three-year International Monetary Fund (IMF) extended fund facility in September, 2016 there had been reversal of gains made under the programme. In particular foreign currency reserves have declined. The IMF had provided a loan of $ 6.2 billion under this programme to help Pakistan in shoring up shrinking foreign currency reserves.
The previous government took some half hearted measures to stop the downslide of the economy. But the currency depreciation, tax rebates on exports on few items and enhancing import duty on non-essential goods proved insufficient to arrest the ongoing decline in reserves. It is pertinent to mention that combined foreign exchange and gold reserves held by the State bank of Pakistan (SBP) peaked to $ 22.6 billion at the end of IMF programme. The decline in foreign currency reserves is drawn by a constant rise in the current account deficit which widened to 4.1 percent of the gross domestic product (GDP) in June 2017 as compared with 1.7 percent in FY 2016. The deficit reflects sharp rise in imports from China because of irrational concessions on 35 percent import6 tariff lines under FTA phase-I.
The development comes as a blow to Pakistan where economic managers are facing a headache in taming the bulging import bill that is eating away foreign exchange reserves. From almost $ 19.46 billion held by the SBP in October 2016 foreign currency reserves have dropped to 48.3 percent to $ 10.7 billion on June 8, 2018. The decline comes at a time when monthly import bill peaked to $ 5.8 billion in May, increasing the already swelling trade and current account deficit. The fragile external account position has forced the SBP in December to let go off rupee for a free float that has now weakened over 17 percent in the last five rounds of devaluations.
The previous government did not listen to the timely warnings of the World Bank and IMF and let the economy slide down by not taking corrective measures to address the worsening macroeconomic indicators mentioned in the World Bank Report, “South Asia Focus Fall 2017,”which was released in August 2017. Former Minister for Planning Ahsan Iqbal rejected and ridiculed that report in press conference held in Pakistan embassy in Washington after attending the joint meeting of World Bank and IMF in September last year. The government put all its eggs in CPEC and did not make serious efforts to expand the revenue base through direct taxes, curtailing wasteful discretionary spending; rampant misappropriations in development expenditure and last but not the least exploiting the export potential of primary commodities and finished goods by diversifying the markets for exports. The debt affordability syndrome, low tax revenue and failure to attract sufficient capital inflow have made the economy vulnerable.