ISLAMABAD - Moody's Investors Service on Friday said that Pakistan's debt affordability would weaken significantly from already low levels in the event of a sharp and sustained increase in the cost of debt.
Moody's, a major credit rating agency, said that Pakistan is facing elevated external pressures stemming from strong domestic demand and capital-import heavy investments related to the China-Pakistan Economic Corridor (CPEC).
"We expect a current account deficit of 4.8% of GDP this year. While reserve coverage of external debt repayments remains adequate, we expect that coverage to weaken," Moody's said in its report 'Sovereigns - Global: Contagion risks greatest where external vulnerability, weak debt affordability meet low policy credibility'.
Unless capital inflows increase substantially, possibly through and in combination with an IMF program, we see elevated risk of a further erosion in foreign exchange reserves.
Around one-third of government debt is denominated in foreign currency. Pakistan's gross borrowing requirements are among the highest among rated sovereigns at around 27-30% of GDP. This is driven by persistent fiscal deficits and the government's reliance on short-term debt, with an average maturity of 3.8 years.
Although Pakistan is not a major recipient of volatile capital inflows, local currency depreciation could raise inflation and prompt additional domestic rate hikes, which would pass through to borrowing costs and further weaken the government's fragile fiscal position.
Earlier, Moody's - one of the top three global credit rating agencies - said the government's debt affordability would also likely weaken further, as the federal government's one-third debt is denominated in foreign currency, said the ratings agency. It said that further depreciation of the rupee against the US dollar would increase the country's debt burden.
The federal government's debt was equivalent to 68 percent of Gross Domestic Product at the end of fiscal year 2017. Moody's said that the ratio was "higher than the median estimate for B-rated sovereigns of 55percent of GDP for 2017".
Despite frequently changing the definition of public debt, the government has gone past its debt limitations, set out under the Fiscal Responsibility and Debt Limitation Act, said Senate Standing Committee on Finance Chairman Senator Saleem Mandviwalla.
In June 2013, when the PML-N government was elected into power, the debt-to-GDP ratio was 64 percent, according to am official of the ministry of commerce.
He said that by the end of fiscal year 2016-17, a majority of the country's debt indicators "deteriorated". He stated that about five indicators worsened but three saw an improvement.
On the medium-term, debt indicators are in the middle of the debt ceilings defined under the Medium Term Debt Management Strategy, he added.
Moody's said that if the depreciation was limited to 5percent, it would pose no significant credit implications for Pakistan.
"However, given the likely evolution of the current account, further depreciation pressures are likely," it added. The credit ratings agency has estimated that Pakistan's current account deficit will remain around current levels, ranging from 3percent to 4 percent of GDP, due to the high import intensity of domestic-driven growth.