All lows for Pakistan

Moodys investor service has maintained Pakistans B3 rating in its annual report. With this rating Pakistan stands abreast of Argentina, Belarus, Belize, Jamaica, Moldova and Nicaragua. The report has rated Pakistans economic, institutional and government financial strength low and susceptibility to event risk high. The credit rating agency has given a stable outlook, even though it believes that the pressure on the balance of payments has renewed. In 1HFY12, Pakistan experienced deterioration in both the financial and the current account. This deterioration contributed to a $2 billion decline in foreign exchange reserves during the same period, and also led to depreciation of the Pakistani rupee. It won be wrong to assume that this contributed to the low economic strength rating. The financial account that was around $979 million in 1HFY11 stood at $97 million in 1HFY12, due to dwindling FDI, and outflows from other heads such as banks. In addition, the current account deficit widened and compared to a surplus of $8 million in 1HFY11, in 1HFY12, the current account posted a deficit of $2.1 billion. The deterioration of current account is owed to lower cotton - average monthly raw cotton prices decreasing by 7 percent year on year - and dwindling volumes of value-added textile products - a year-on-year decrease of more than 10 percent of quantities exported. In addition, even though remittances are still rising, the pace of growth has slowed down, coming up as a cause for concern on the balance of payments front. In addition, the increase in the oil bill due to higher import volumes and a roughly 36 percent price hike in 1HFY12 over the same period last year further contributed to the current account deficit. According to IMF Executive Boards roundup of Pakistans economy last Monday, the fiscal deficit, which stood at 6.6 percent in FY11 is expected to reach 7 percent in FY12 (considerably above the 4.7 percent target), unless any corrective measures are taken. The high fiscal deficit is attributed to lower tax collections, delays in introduction of reformed GST, flood-related expenditure, high debt servicing and huge subsidies to the power sector, resulting in the low rating for the governments financial position. The rating agency also gave a low rating to institutional strength, attributing tensions between the government and the military as the main reason. The report attributes the high political, economic and banking risk as the main reason for the high susceptibility to event risk. These risks arise from worsening Pak-US ties and the end of IMFs last stand-by agreement with Pakistan. Its high time, policymakers should pay heed to the dire situation earmarked by Moodys and attempt to address risks from poor fiscal management and a weakening balance of payments situation.