THE flare-up in political turmoil in Pakistan following the assassination of Punjab Governor Salman Taseer wont have an immediate impact on the nations credit ratings, Moodys Investors Service said Wednesday, but it warned that prolonged political instability and economic stagnation could lead to a banking crisis in Pakistan, according to The Wall Street Journal. The prolonged stagnation of Pakistans economic growth and the high political risk will be the large risks for Pakistan over the next 12 to 18 months, said Aninda Mitra, Vice President and Senior Analyst at Moodys Sovereign Risk Group. If the economic stagnation and political instability continue, it could either cause a sovereign debt restructuring or a banking crisis to occur in Pakistan, Mitra told Dow Jones Newswires in a telephone interview. The country was thrown into deeper turmoil Tuesday when the Punjab governor was gunned down in Islamabad by a member of his security detail. The assassination of Salman Taseer came just days after the MQM defected to the opposition, plunging the ruling party into a minority in the National Assembly. The staying power (of the government) for implementing tough economic reforms is currently under pressure, Mitra said. Mitra said the assassination was symptomatic of the high political risk in Pakistan but wouldnt impact the countrys sovereign credit ratings just yet. These kinds of events are already factored into our B3 rating. The event (assassination) itself comes as a shock to the political system but by itself, it doesnt raise the risk (of a downgrade), Mitra said. Pakistan, plagued with large budget deficit approaching 6pc of gross domestic product compared with 4.7pc budgeted this year and a long-running terrorist insurgency, has been dependent on foreign financial aid to keep its economy afloat. The International Monetary Fund, one of several foreign donors, has provided $7.4 billion in assistance under a $11.3 billion emergency loan package set in 2008. Attached to the IMF program are strict conditions requiring Pakistan to carry out reforms that include changes to its tax structure and privatization of state enterprises to rein in its budget deficit and step up economic growth. But Pakistans failure to tackle its budget deficit by taking steps to boost revenue and slash spending has frustrated the IMF as well as other foreign donors, including the World Bank and Asian Development Bank. The US has also called on Pakistan to push harder on reforms. In October, Secretary of State Hillary Clinton told a meeting of Pakistans foreign aid donors in Brussels that the country must boost tax revenue, which currently is equal to 9pc of GDP, one of the lowest in the world. Some supporters of Pakistan have begun over the past six months to withhold assistance until tax overhauls and other changes, such as reducing electricity subsidies, are implemented. The World Bank and ADB havent transferred any of a combined $3 billion in budget support pledged for this fiscal year, said a senior Pakistan Finance Ministry official. The IMF has withheld the last tranche of its assistance since May 2010. Zardari is scheduled to travel to the US on Jan. 12 to attend a memorial service for Richard Holbrooke, President Barack Obamas special representative to Afghanistan and Pakistan who died last month. Zardari is likely to discuss Pakistans economic future with US officials during the trip. Recent floods, power and gas shortages, and a weaker than expected performance by the agriculture sector have been dragging on the economy. Pakistan Finance Secretary Waqar Masood Khan said Pakistan will miss its economic growth target of 4.5pc for the current fiscal year ending June 2011, forecasting GDP will expand just 2.5pc, a newspaper reported on its website Wednesday. Shahid Hafeez Kardar, the governor of the State Bank of Pakistan, said that the central bank expects the budget deficit to reach 6pc of GDP, or PKR1 trillion, by the end of the fiscal year in June, according to a separate report in the same newspaper. The grim economic picture has undermined Pakistans currency. The U.S. dollar climbed 2pc against the Pakistan rupee last year, even as it lost ground against most other Asian currencies as investors pumped money into the Asian region, one of the fast growing parts of the global economy. The dollar ended Wednesday trading at PKR85.78, up slightly from PKR85.71 at Tuesdays close. On Tuesday, the Pakistan Muslim League (N), the largest opposition party, headed by former Prime Minister Nawaz Sharif, said it wouldnt launch a no-confidence motion in the Zardari government if it agrees to a series of measures such as reducing expenditure and curbing corruption over the next 45 days, providing the coalition with a degree of stability. The key risk is not whether the government will survive. The risk is that now that the government has been shaken, there will be no reforms. All this political maneuvering is detrimental for the economy, said Sayem Ali, an economist with Standard Chartered Bank in Karachi. The government borrowed $3.6 billion from the central bank between July 1 and early December to make up for its revenue shortfall, stoking inflation. According to a borrowing program announced for the first quarter of 2011, the government will sell treasury bills worth PKR1 trillion. It obviously means the deficit will be higher, rates will get pushed up and yield curve will steepen. We expect the central bank to hike rates again, said Ali at Standard Chartered. SBP raised its key lending rate on Nov. 29 to curb inflation, which it said was unlikely to come down unless the government cuts its heavy borrowing program. The State Bank of Pakistan lifted its discount rate by 50 basis points to 14.00pc, its third 50-basis-point hike since it began tightening monetary policy in July. Ali said that the nations dollar-denominated government bonds have already priced in the political turmoil, but any sovereign rating downgrade will push up yields. The risks for a sovereign downgrade are rising. The five top banks in Pakistan were recently downgraded by Standard and Poors and if the IMF program gets derailed, it could hurt the sovereign (rating) too, he said.