Pakistan could face risk of rating downgrade

Moody’s says fiscal deficit likely to cross target.

ISLAMABAD: Pakistan could face the risk of a ratings downgrade if it fails to quickly implement reforms to address a growing fiscal deficit, Moody’s Investors Service said on Friday.

Moody’s currently has a B3 rating for the country. “A key to a (negative) change in the rating is if the fiscal deficit is more than what we expect,” said Aninda Mitra, Moody’s sovereign analyst for Pakistan, who expects the fiscal deficit to be six to seven per cent of gross domestic product for the year ending June 30.

He also said inflation, which is rising at a faster-than-expected rate, brought on by increased government borrowing, could lead to a downgrade. The government agreed with the International Monetary Fund (IMF) that it would keep the fiscal deficit at 4.7 per cent for the fiscal year ending June 30.

Analysts agree this figure is likely to be crossed. Some forecast the fiscal deficit to be around eight per cent if reforms are not implemented, higher than the central bank’s prediction of between 6 and 6.5 per cent.

Pakistan has a B- rating from Standard & Poor’s Rating Services, just one notch above a CCC rating that would imply an impending default. But it does not expect to change the country’s rating. Overshooting the IMF’s targets should not surprise anyone, given last year’s large deficit and the prospects of an even larger one this year, said S&P analyst Agost Benard.

The country’s current account recorded a surplus of $26 million in the first six months ended December 31, due to rising remittances from overseas Pakistanis and steady exports.

Still, a prolonged delay in the implementation of the reformed general sales tax (RGST) due to political opposition, a low tax base and the government’s failure to raise fuel prices are all adding to fiscal pressure. Commentators see the divided coalition government as standing in the way of much-needed reforms.

Published in The Express Tribune, February 12^th, 2011.