Moody’s further downgrades Pakistan’s credit rating

Moody’s, an international organization that ranks countries’ economies at the global level, has further lowered Pakistan’s economic rating. Global rating agency Moody’s has issued a revised rating for Pakistan and has downgraded its sovereign credit rating from B3 to CAA-One.

Moody’s has kept Pakistan’s economic outlook as ‘negative’. According to their analytical report, the decision to place Pakistan in the CAA-One rating has been taken in view of the government uncertainty arising after the recent catastrophic floods, external financial threats, and high debt sustainability risks.

From June to August, unusual monsoon rains and melting glaciers flooded one-third of Pakistan, killing nearly 1,700 people, including women and children, and massive damage was recorded in terms of infrastructure, livestock, and crops. According to Moody’s rating agency, the post-flood situation will also affect Pakistan’s external financing needs, which will increase the risks of a crisis in terms of maintaining payments.

Moody’s said in its statement that after the floods, Pakistan’s liquidity and external debt defaults increased and there was a large rise in social spending while government revenues were severely damaged. In this context, it was stated that Pakistan’s weak institutions and the strength of the government are raising concerns about whether the country will maintain a credible policy path to obtain more debt. The negative outlook also reflects risks that if debt restructuring is required, it could extend to private lenders.

Economists here in Pakistan are describing this move by the global rating agency as disturbing for the local economy. They say that after the devastating flood situation, the negative rating of the economy is likely to further reduce foreign investment and it would not be easy to attract foreign investors, especially after the current ratings issued by Moody’s.

According to the finance ministry of Pakistan, Moody’s issued the rating without consulting the State Bank of Pakistan (SBP) and the Ministry of Finance which is not acceptable at all. Within the next 24 hours after the rating was issued, the officials of the Ministry of Finance held two meetings with representatives of Moody’s in the country. According to Finance Ministry data, Moody’s rating is not correct, government policies in the last few months have helped in financial stability. “The Government of Pakistan has sufficient liquidity and financing arrangements to meet its external obligations. Continuation of the IMF program is confidence in the strength of the country’s financial and economic system, and Pakistan is committed to the agreements reached under the IMF program” said in a statement issued by the finance ministry of Pakistan.

While speaking to EAT News, the economic expert Dr. Farrukh Saleem said due to the negative rating, Pakistan will become an expensive country to invest in, which would result in a high inflation rate and a price hike is likely to increase further. Dr. Farrukh has said that governments around the world are doing everything to improve their credit rating but our government most of the time does not take this issue much seriously. This is the reason the government is not able to give any solid policy and solution on the economic front.

Federal Finance Minister Mr. Ishaq Dar, while reacting to Moody’s downgrading of Pakistan’s credit rating, said, “I will say, the nation should not be afraid of Moody’s rating. Matters have been discussed on a higher level. Moody’s has to review and revise their decisions and make room for Pakistan, otherwise, I will give a suitable answer in the upcoming week’s meeting”.

Mr. Ishaq Dar added that “Moody’s decision is not based on single-day observation; they must have been working on it for months. It seems hard that they will reverse their decision immediately. Pakistan is currently under the IMF program, the continuation of which is based on verification and confidence in the country’s fiscal discipline, debt sustainability, and ability to serve all its domestic and external obligations. The country remains committed to the agreements reached under the IMF program”.

The purpose of credit rating by Moody’s is to assess the risks to any economy and determine its rating based on the given fiscal variables. International financial institutions such as IMF, World Bank (WB), and Asia Development Bank (ADB) fix the marks for issuing loans to a country in accordance with the ratings issued by different credit rating agencies including Moody’s.

On the other hand, according to the State Bank of Pakistan (SBP), the government paid 4 billion dollars in loan installments in the first quarter of this financial year (2022-23), while 600 million dollars were paid in the 10 days of October.