Government Outlook on Finances, Debt and CPEC is Too Optimistic: Moody’s

Moody’s Investors Services, one of the two most credible rating agencies in the world, has stated that despite very weak debt affordability metrics, Pakistan’s debts will continue to rise while the fiscal deficit will exceed official projections yet again.

Moody’s latest report says that during the next two years economic growth rate is expected to remain below official expectations due to slow progress with regards to the China-Pakistan Economic Corridor (CPEC) projects. On the other hand, Moody’s mentions that Pakistan’s medium-term growth is looking strong due to new investments and progress on reforms suggested by the International Monetary Fund (IMF) four years ago.

Pakistan’s credited rating, however, has remained unchanged, which is still at B3. This means that investment in Pakistani bonds is highly speculative though the country shows stable outlook. The rating was assigned in June 2015 and there has been no change since then.

A rating of B3 stands at 16^th out of the 21 rating tiers used by the global agencies. A slightly lower rating would have meant that Pakistan is considered a risky country for potential investors.

The report adds,

The government’s debt burden is high and fiscal deficits remain relatively wide, driven by a narrow revenue base that also restricts development spending.

It is also stated that foreign exchange reserves are also vulnerable to significant increase in imports.

By March this year State Bank of Pakistan (SBP) reported that Pakistan’s total debt and liabilities stood at Rs. 24.14 trillion (75.8% of GDP). From that amount, Rs. 20.8 trillion (65.5% of the GDP) are the government’s total debt and liabilities. The amount excludes Public Sector Enterprises obligations, which would raise that amount to nearly 70.4% of the GDP.

During the past one twelve months, the federal government has amended the definition of public debt twice in order to show a better picture. Moody’s says that Pakistan government’s debt burden is substantially higher than B-rating’s median of 52.6% of the GDP.

The rating agency has also predicted that the budget deficit will remain materially higher than what the finance ministry estimates for the recently concluded year and the upcoming fiscal year. The deficit is estimated to rise to about Rs. 1.5 trillion (4.7% of the GDP) for the year 2016-2017. Which is much higher than what the IMF and the finance ministry’s revised estimates predicted.

It is expected to grow even further and touch 5% of the GDP, Rs 350 billion higher than the finance ministry’s targets, in the upcoming fiscal year despite the government’s attempts to advance fiscal consolidation.

The report states,

Large fiscal deficits and a reliance on short-term debt have also contributed to very high gross borrowing requirements. In addition, debt affordability metrics, which include interest payments as a percentage of revenues and GDP, are very weak for Pakistan relative to its peer group.

It must be mentioned that Pakistan government had budgeted $2 billion in short-term borrowings from foreign commercial institutions but closed the fiscal year at around $4 billion in short-term loans.

Debt servicing costs are also on the rise and have mounted up to $5.23 billion – one fourth of the total exports during 2016-17.

On the other hand, Moody’s expects CPEC’s economic impact to materialize slower (at 5.5%) than the government’s predictions of 6%. Moody’s also expects the pace of public project implementation to be slower, keeping in view the previous track record of Pakistan government.