Moody’s slashes Pakistan’s credit rating

Moody’s Investors Service

Moody’s Investors Service is one of the leading credit rating agencies in the world, and their ratings can have a significant impact on a country’s ability to borrow money on the international market. A downgrade in a country’s rating can make it more difficult and expensive for the government to borrow money, which can exacerbate a payment crisis.

Pakistan’s Credit Rating Downgraded by Moody’s

downgraded Pakistan’s sovereign rating by two notches to “Caa3” on Tuesday amid talks on international borrowing, saying the country’s increasingly fragile liquidity “significantly increases default risks”.

The cash-strapped country is in talks with the International Monetary Fund (IMF) to secure a $1 billion loan that has been held up by political issues since late last year. It is part of a stalled $6.5 billion rescue package originally approved in 2019.

The payment from the IMF may help cover the South Asian country’s immediate needs, Moody’s said, but warned that “weak governance and heightened social risks hamper Pakistan’s ability to consistently implement a range of policies that would secure large volumes of financing.”

Islamabad is taking key measures, such as raising taxes and removing blanket subsidies and artificial exchange rate restrictions, to secure the funds to stave off the economic crisis.

The rating agency also said Pakistan’s sources of financing for its “significant external payment needs” after the end of the current IMF program, which ends in June 2023, are “very limited”.

Pushed to the brink by last year’s devastating floods, Pakistan has barely enough stockpiles for three weeks of essential imports while a bitter election is due to be held by November.

A Reuters poll showed on Tuesday that Pakistan’s central bank may raise rates by 200 basis points at an off-cycle meeting this week to unblock IMF funds.

Important measures to address Pakistan’s Credit Rating Issue

A credit rating downgrade can exacerbate these challenges, as it can lead to a loss of confidence in the country’s ability to repay its debts, making it more expensive for the government to borrow money and potentially causing investors to pull their money out of the country.

It’s important for the Pakistani government to take steps to address the underlying issues that are contributing to the payment crisis, such as improving export competitiveness, attracting foreign investment, and implementing sound macroeconomic policies. These measures can help to restore investor confidence and put the country on a more sustainable financial footing.

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