Macroeconomic environment for Pakistan remains lacklustre

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KARACHI: Moody’s Investors Service maintained Pakistan’s Caa1 rating and assessed that the low economic growth has been targeted by the protracted energy crisis, whereas inconsistent policies, supply-side constraints and ineffective policies have resulted in fiscal weakness, according to a statement issued on Thursday. Moody’s Investors Service said that the macroeconomic environment for Pakistan (Caa1 negative) remains lacklustre because of persistent supply side constraints and ineffective policies. Pakistan’s Caa1 rating and negative outlook reflect Moody’s assessment of four factors: its ‘low’ economic and government financial strengths, its ‘very low’ institutional strength, and its ‘high’ susceptibility to risks from financial, economic and political events, it said.

According to the latest Moody’s report titled, “Credit Analysis: Pakistan,” the macroeconomic environment remains lacklustre, with the main constraints to growth being a protracted energy crisis that has deterred investment; a chronically weak fiscal structure that has fuelled high government borrowing and inflation; and continued policy uncertainty.

In particular, looming repayments to the International Monetary Fund (IMF) pose as risks to Pakistan’s macroeconomic stability and external payments position. International reserves declined to $8.7 billion in January from $12.5 billion a year ago. Any further decrease in the capital flows and the absence of emergency liquidity infusions would ultimately pressure reserves adequacy and increase the possibility of default, it reported.

The country’s fiscal deficits remain large because of structurally weak revenue collections. The budget targets for FY2012 saw large slippages, and this trend will likely to continue in FY13.

Limited external financing has fuelled high budgetary borrowings from the banking sector and impaired the effectiveness of the monetary policy, it said. In addition, the contentious state of domestic politics and weak governance standards — both of which have blocked progress in the economic reform — support Moody’s view that Pakistan’s institutional strength is “very low”.

Tensions within the country are escalating in the run-up to the parliamentary elections earmarked between March and May. These developments indicate that the relations between the executive, judiciary and military arms of government are worsening, and present a risk to a smooth transfer of power. Such events also undermine Pakistan’s ability to formulate policies to address pressing economic challenges, bolster investors’ confidence and attract external financial support from the country’s official creditors and donors, it said.

Moody’s assesses Pakistan’s susceptibility to event risks as ‘High’. This stems from an increased level of economic risks due to continued pressures on the balance of payments. Political risks are also high, given uncertain relations with the United States and continued tensions with India. The increasing credit concentration of the country’s banks to the sovereign remains a source of credit risk over the outlook horizon.


Courtesy: The News

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