Pakistan’s Capacity to Pay Back Foreign Loans Expected to Weaken: Moody’s

Pakistan’s capability to pay back foreign loan could become weaker if the amount increases further, according to Moody’s Investors Service.

Moody’s said that Pakistan is facing elevated external pressures stemming from strong domestic demand and capital-import heavy investments related to the China-Pakistan Economic Corridor (CPEC).

The credit rating agency said in a report released on Friday. Pakistan’s fiscal deficit is expected to reach 4.8 percent of the gross domestic product during the current fiscal year whereas depreciation of domestic currency will increase inflation and increase borrowing costs.

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“We expect a current account deficit of 4.8 percent of GDP this year. While reserve coverage of external debt repayments remains adequate, we expect that coverage to weaken,” the report said.

Unless capital inflows increase substantially, possibly through and in combination with an IMF program, Moody’s sees an elevated risk of further erosion in foreign exchange reserves.

The rating agency elaborated that around one-third of Pakistan’s debt is denominated in foreign currencies, with the country’s gross borrowing requirement among the highest from those countries that are rated by Moody’s.

This is driven by persistent fiscal deficits and the government’s reliance on short-term debt, with an average maturity of 3.8 years.

Although Pakistan is not a major recipient of volatile capital inflows, local currency depreciation could raise inflation and prompt additional domestic rate hikes, which would pass through to borrowing costs and further weaken the government’s fragile fiscal position.

“We find that Pakistan’s debt affordability would weaken significantly from already low levels in the event of a sharp and sustained increase in the cost of debt”, the report added.