Following the disastrous floods that struck the nation earlier this year, Moody’s on Thursday lowered Pakistan’s sovereign credit rating by one notch, from B3 to Caa1, citing higher government liquidity and external vulnerability risks.
Massive areas of Pakistan have been drowned by the floods, which were brought on by unusual monsoon rains and glacier melt, and about 1,700 people have died, the majority of them women and children.
According to the rating agency, the floods will increase Pakistan’s need for external financing, increasing the likelihood of a balance of payments crisis.
The prognosis for Pakistan by Moody’s remained negative.
In the wake of the disastrous floods that have struck the nation since June 2022, the decision to lower the ratings to Caa1 is motivated by increased government liquidity, external vulnerability risks, and higher debt sustainability risks. The floods have significantly increased the need for social spending while also making Pakistan’s liquidity and external credit problems worse, according to a statement from the organization.
For the foreseeable future, Pakistan’s long-standing credit vulnerability of debt affordability will continue to be severe.
The Caa1 rating reflects Moody’s belief that, in the absence of access to market funding at competitive rates, Pakistan would continue to be heavily dependent on financing from multilateral partners and other government sector creditors to satisfy its debt payments.
Particularly, Moody’s anticipates that Pakistan’s Extended Fund Facility (EFF) agreement with the IMF would continue to exist and offer a pathway for borrowing from the IMF and other multilateral and bilateral partners in the foreseeable future.
Debt sustainability risks
In fiscal 2023, Moody’s predicts that the fiscal deficit will increase from its pre-flood estimate of 5-6% of GDP to 7-8% of GDP. As long as spending on social necessities and reconstruction is substantial, pressures on the public budget are expected to continue in the coming years.
Moody’s predicts that interest payments would rise to about 50% of government revenue in fiscal 2023 from 40% in fiscal 2022 as a result of rising interest rates and lower tax collection, and then stabilise at this level for the ensuing few years.
It stated that the government’s ability to repay its debt and meet the population’s basic social spending demands would be further hampered if a sizable portion of revenue went to interest payments.
LIQUIDITY AND EXTERNAL VULNERABILITY RISKS
In addition, the rating agency stated that it anticipated Pakistan’s current account deficit to increase to 3.5-4.5 percent of GDP for the upcoming fiscal year.
“Although a variety of imports are projected to decrease as demand declines, imports of food and other necessities like medical supplies will rise, putting a strain on export capacity.
The World Bank had earlier in the day estimated a 2% growth rate for the Pakistani economy for the fiscal year 2022–2023—a 2% decrease from its earlier estimates in April and June 2022.
The worldwide agency increased the prediction for Pakistan for FY23–24 to 3.2% in its report.
