The decision by international ratings agency, Moody’s, to downgrade Pakistan’s credit rating from B3 to Caa1, is a reflection, both of our dysfunctional political system and our economic predicament. At a time when our government is at loggerheads with the judiciary and no one is quite sure how that tussle is going to play out before the next elections while, simultaneously, we are facing large loan repayments to the IMF even as our foreign exchange reserves dwindle, it is no surprise that Moody’s has taken this step. The actual impact of the downgrade will not be too severe, since Pakistan does most of its borrowing from the IMF and not international capital markets. Hence, we won’t suffer from the higher interest rates a lower credit rating brings.
The effect of a ratings downgrade is mostly psychological, but even that can have serious real-world effects. Foreign investors, to the extent that they exist in the country, will now be even more wary of entering Pakistan. The rupee is likely to plunge even further. It is expected that foreign direct investment in the country will fall below one billion dollars and that there will also be a serious decline in remittances because of the state of the global economy. What this means is that the government will go into further debt and its foreign exchange reserves will decrease. What Moody’s has essentially done is not to hurt our future prospects as much as admonish us for our past economic performance.
The next step should obviously be to put our economy on a stronger footing. This will require political courage, something the present government has never possessed. It has backed down just about every time its allies have protested against the removal of power subsidies. But since Pakistan is an oil-importing country, this subsidy is costing us dearly. To decrease our balance of payments deficit, it is essential to end the subsidy. Ours is an economy that is on life support and that fact was merely recognised by Moody’s. Instead of blaming our woes on our junk bond status, we need to figure out why this happened and what we can do to rectify it.
Published in The Express Tribune, July 16th, 2012.
COMMENTS (5)
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@Abdullah Finally a view that is right. We need to bring in gold standard, increase zakat to at least 50%, all land should be taken over when owner dies and shared out equally. Everyone must provide at least 15% of his time as voluntary labour as help for community such cleaning streets, helping sick people, tending fields. Capitalism is failing, communism is faling we need to introduce Islamic economics which is the true system.
removing subsidy is not the way forward. Actually certain sectors need to be nationalised and owned by public than foreign investors. This is the only way the prices will go down as foreign investors are only interested in making profit from key services and utilities something that the poor public cant afford.
Another thing that the editorial misses is the solution aspect. Capitalism is not the way forward and the notion that free market will distribute wealth is already challenged in the super power of the day i.e. US where 50million live below poverty line.
Islamic view on public and private property as well as introduction of gold standard can decrease inflation in Pakistan and stabilise the economy.
To reduce your BOP deficit you need to do more than just end the oil subsidy!
............and while we have been downgraded, your Deputy Chairman is giving a talk on our (his) new growth strategy in Washington DC.
Very well said. It is time for the nation and its leadership to sit-back and think where we were and where we are today, how we got into this mess, and what is the best way to come out of this crisis. There is a dire need to come out of western phobia, jehadi mentality, and institutional struggle rather warfare.
"The actual impact of the downgrade will not be too severe, since Pakistan does most of its borrowing from the IMF and not international capital markets. Hence, we won’t suffer from the higher interest rates a lower credit rating brings."
True. In fact Pakistan was 6 notches down below investment grade even before the current downgrade. Thus there simply was no market for Pakistani bonds for the last 5 years (including Musharraf's last year) - thus question of increased interest does not arise when no-one is prepared to lend at any interest given the already very high risk associated.
The impact of this is going to be in terms of those investments from foreigners which re guaranteed by surety from Government of Pakistan. This further reduces the value of such surety and hence reduces the likelihood of fresh FDI.