According to Moody’s Investors Service, one of the big three crediting rating agencies, the political uncertainty in Pakistan following the elections, where no political party won an outright majority, is ‘credit negative’. In the context of Pakistan, ‘credit negative’ would mean a situation where a development, event, or trend has a negative impact on the country’s creditworthiness.
Analyst Grace Lim wrote: “While negotiations between parties to form a coalition government are currently underway, prolonged delays will raise political and policy uncertainties at a time when Pakistan faces significant macroeconomic challenges, particularly its very weak external and liquidity position.” In simpler terms, Analyst Grace Lim is saying that if the negotiations between political parties to form a coalition government in Pakistan take a long time, it will create more uncertainty about the country’s politics and policies. Unfortunately, this uncertainty comes at a bad time because Pakistan is already dealing with big economic challenges, especially concerning its ability to manage payments on its external debt. So, delays in forming the government could make it harder for Pakistan to tackle these economic problems effectively.
Question: When an event or trend is labeled as ‘credit negative,’ what does it suggest? Answer: It may lead to a downgrade in Pakistan’s credit rating or an increase in borrowing costs for the government. This can have significant implications for investors, lenders, and policymakers. A downgrade will have two implications: a negative impact on investor confidence and reduced access to international capital markets (particularly significant this year given Pakistan’s estimated external financing requirement of $24.965 billion).
Here are four potential economic impacts on Pakistan of the statement from Moody’s regarding the political uncertainty following the elections:
1. Higher priced petrol and diesel. Pakistani consumers are already bearing an additional burden of roughly Rs10 per liter due to elevated country risk. If the political uncertainty following the elections is deemed ‘credit negative,’ this premium may further escalate, exacerbating the financial strain on consumers.
2. Securing an IMF loan will become more challenging. The current Stand-By Agreement (SBA) is set to expire by the end of March. Given our substantial external financing requirement, a larger Extended Fund Facility (EFF) will be necessary. Moody’s characterization of political uncertainty as a ‘credit negative’ signifies a heightened perception of risk associated with Pakistan’s borrowing. Consequently, the IMF may exhibit greater reluctance to approve a loan or may impose stricter conditionalities, potentially impacting the terms of the loan.
3. Deterrence of foreign investment. Just when the SIFC (Special Investment Facilitation Council) is undertaking concerted efforts to attract foreign capital, political instability poses a significant risk, potentially dissuading foreign investors from considering Pakistan as a viable investment destination. Moody’s statement could further reinforce this perception, making Pakistan less attractive to foreign investors seeking stable political environments for their investments. 4. Weakened investor confidence and capital flight. Political uncertainty erodes investor confidence for domestic investors, leading them to withdraw their investments. Moody’s statement could contribute to this sentiment, potentially triggering capital flight. In mid-2022, the EU Tax Observatory released a report revealing that Pakistanis have invested $10.6 billion in Dubai’s real estate market, positioning them as the third-largest investors in the Gulf city. Capital flight could put further pressure on the Pakistani rupee.
Analyst Grace Lim further said that a coalition government may not be very united and politically strong, and it will face challenges in securing consensus to pursue difficult, but necessary reforms, including revenue-raising measures. There is also uncertainty around the extent of public protests because they may challenge the legitimacy of the new government.
The message from Moody’s and Analyst Grace Lim is loud and clear: Pakistan’s political uncertainty is jeopardizing its economic security. In the face of the stark warning, three imperatives must rise above the din of partisan discord:
1. Forge a Stable Government, Now: Remember, every minute spent in protracted negotiations deepens the uncertainty. Remember every minute spent in protracted negotiations erodes investor confidence. Our leaders must rise above petty squabbles and swiftly form a stable government, one that commands international trust. Remember, the people have spoken; now, answer their call with unity and purpose.
2. Prioritize Economic Stability, Now: Political gamesmanship must be cast aside. The nation craves decisive action on economic fronts. Secure vital IMF loans, attract foreign investment, and manage external debt – these are not mere tasks, but lifelines for Pakistan and everyone who lives in it.
3. Seek Consensus on Reforms, Now: Difficult decisions can be postponed no more. Reforms must be pursued. A fragmented coalition is no excuse for inaction. Seek common ground, build bridges, and remember, the well-being of 240 million rests on your shoulders.
The time for action is now. Will our leaders rise to the occasion?
