Impediments refuse to leave Pakistan unattended. On February 27, Moody’s Investors Service, a global integrated risk assessment firm that empowers organizations to take better decisions, issued a report on Pakistan’s long-term credit rating. Moody’s not only kept the rating unchanged at Caa3, but it also identified hurdles (political and economic) in the way of improving Pakistan’s credit status.
In the Moody’s lexicon, the Caa3 ranking is a jinx, for its being considered poor standings of a country subject to very high credit risk. Pakistan has been at this footings since February 2023, when Moody’s downgraded Pakistan’s rating from Caa1 to Caa3, thereby declaring “very high liquidity and external vulnerability risks” attached to dealing economically with the country.
For Pakistan, the immediate concern is to negotiate the availability of the remaining third tranche amounting to $1.1 billion in this month from the ongoing Standby Agreement with the International Monetary Fund (IMF). In this month, Pakistan would be facing the challenge of securing the tranche in the face of allegedly rigged elections – the exercise which divided the country. Form 45 representing the will of voters has lost their battle to Form 47 representing the dictate of the state machinery.
Nevertheless, the main implication of the Moody’s report is to assess investment risks for any international loan donating organizations such as the IMF and others, before they enter into any agreement with Pakistan, especially in the long term. This is where the rub lies. From April to June, rounds of negotiations are expected between Pakistan and the IMF. Parleys would be done by the newly formed coalition government, while fighting for its own legitimacy. The government’s preference would be to demand a loan amounting to at least $6 billion for four or five financial years, starting from July 1, 2024.
To elaborate, Pakistan may be asking for an Extended Fund Facility (EFF) to overcome medium-term crisis of the balance of payments owing to structural weaknesses which require time to address. In 2021, Pakistan deviated from its commitments made to the IMF, thereby losing the IMF’s trust. Pakistan was penalized for the misadventure. This time, however, Pakistan may be showing its willingness to identify new areas (such as real estate and retailers) to collect revenue, and implement medium-term structural reforms which could permit a longer repayment period.
Ostensibly, Pakistan is eager to entering into a long term engagement with the IMF, considering it an organization of the last resort. Along with the EFF, Pakistan may be asking for the Extended Credit Facility (ECF), which is medium-term financial assistance, to deal with the balance of payments problems. The ECF is available to poor countries which are struggling to reduce poverty. For the past some years, environmental catastrophes such as rains and floods have been overrunning Pakistan’s south, plunging the country into the poverty trap.
The availability of both the EFF and ECF depends upon the way Pakistan shows willingness to do its part of the job: introducing structural reforms through taxation and privatization, besides reducing expenditures. A major challenge would be that a weak coalition government would be formed to negotiate with the IMF – to secure a huge loan from the IMF, which would impose tough conditions.
Through its rating mechanism, Moody’s avowal to alarm the world of Pakistan’s higher probability of default and a greater degree of investment risks is a caveat that Pakistan has to conquer. Pakistan has to show that its potential to afford debt is higher than what is adumbrated by the Moody’s. Nonetheless, a picture is clear to everyone. With high debt-servicing liabilities, Pakistan’s having room for fiscal flexibility has been shrunk, thereby making the country incapable of undertaking key expenditures on infrastructure and social initiative. It simply means that the loan sought would not be spent on the developmental projects once again. This is the point at which Pakistan and the IMF would wrestle with each other.
Pakistan’s laggard social sector (health and education) is bound to hurt Pakistan in the long run. The same is the situation with the infrastructure (road, sewerage, water channels) area. Pakistan’s misplaced spending priorities have disaffected its population, which uses all means available at its disposal to evade taxation. The recent attempt to maneuver the general elections has added fuel to the proverbial fire by disenfranchising the voters, who thought that they could chart their future through the ballot box.
Since the time Pakistan has taken its eyes off the population sector, the crisis of overpopulation has gone grim. Pakistan’s failure to do population planning comes back to haunt the country.
Nevertheless, privatization would mean reduction in the size of sovereignty. Selling assets to run the country may be feasible in a country which reduces its expenditures especially non-development one. However, Pakistan is in no mood to do so. Money got through privatization is spent quickly. Interestingly, Pakistan is hoping against hope from prospects of foreign investment in the agriculture sector.
The major challenge for Pakistan is how to make itself investor friendly. The facility of the ease of doing business is applicable to both local and foreign investors. If local investors are disinclined to invest, foreign investors would never prefer Pakistan. The fear of political instability is still running high, making the country unsuitable for foreign investment. Before achieving economic stability, achieving political stability would be a huge challenge. Instead of resolving the issue, Pakistan has enhanced the challenge and has fallen a pray to.
To offer space for the ease of doing business, Pakistan has to improve the performance of its judiciary, which is mostly entangled in wasting its time and worsening it repute by deciding on fake, fabricated and politically motivated cases.
Dr Qaisar Rashid
The writer is a freelance columnist. He can be reached at qaisarrashid@yahoo.com