Ratings downgrade
Instead of blaming our woes on our junk bond status, we need to figure out what we can do to rectify it.
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.
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.