The confluence of Moodys rating outlook revision on local and sovereign bonds and Holbrookes focus on Pakistans energy crisis are not merely an interesting coincidence but they are the outcome of the approval of additional credit facility by IMF on top of its conventional standby facility. Indeed, these bode well for short-term outlook of foreign exchange reserves, exchange rate and partial solution to our energy crisis. But there is a flipside to it.
"The stable outlook was prompted by the recent augmentation of Pakistans IMF program by $3.2 billion to more than $11 billion, and several ongoing policy and structural reforms" said Moodys while commenting on the reason behind upgrade. The underlying theme, therefore, is to drop that irrational exuberance over outlook upgrade and start thinking about what will happen in the future.
We are still six notches below from investment grade at B3 for both foreign and local sovereign ratings. Moodys says it does not see Pakistan economy falling apart in next 12-18 months and that is exactly the point. This medium term stability is based on borrowed money, implying the resurgence of the 90s debt trap ahead.
The very IMF facility on which Moodys has based its outlook would take Pakistans external debt to $54 billion (net of debt retirement of $3.6 billion in FY10), which will account for 30 percent of total economic output while incorporating the optimistic growth target of 3.3 percent in FY10. This means that external debt, which was reduced sharply to about 28 percent in 2008, will be moving north again.
And when that happens, it will threaten our import cover - calling agencies to cut their ratings. Likewise, there is nothing to cheer about higher banks ratings outlook as its just a function of improved economic indicators, including stabilising NPLs. To the likes of Wests state-run stimulus packages - critics argue that high government deficits will lead to hyper-inflation, as the system is set for bigger deviation than ever before and IMFs support to Pakistan is no different to it.
Hence, in the long-run - and as long we are laden with debt our economic system will remain fragile. But who cares for the long run - "in the long run we would all be dead", one may quip citing Keynes - "besides in the medium-term our country managers will change faces". However, one must ignore such myopic view as calls by Western thinkers to slash debt and raise equity in search of a new financial world, demand an increased reliance on FDI and indigenous resources gains further strength.