LAHORE: Moody’s in a report released on Thursday projected Pakistan’s real GDP growth to slow to 4.3-4.7% in FY19 and FY20 from 5.8% in FY18 due to policy measures taken to address the external imbalance.
For addressing the external imbalance, Moody’s stated policymakers have tightened domestic monetary conditions by allowing the rupee to depreciate by around 30% since the start of December last year.
It added, the hike in interest rate by 425 basis points to 10%, tightening fiscal policy and imposition of regulatory duties on imports of non-essential goods was initiated to address the external imbalance.
Due to a sharp depreciation of the rupee since December last year, higher electricity and gas tariffs, Moody’s said it expects inflation to increase to an average of 7% over FY19 before moderating to an average of 6.5% in FY20.
Due to higher remittance inflows, which rose 15% year-on-year (YoY) during the first four months (July-October) of FY19 will support private consumption, said the report.
“With over half of remittances originating from the Gulf Cooperation Council (GCC) economies, we expect the ongoing GCC recovery and firmer oil prices compared with 2014-16 to continue to underpin remittance growth,” said Moody’s.
According to the rating agency, due to significant external pressures fueled by wider current-account deficits have caused the foreign exchange reserves to slide which are unlikely to be refilled in the near-term unless capital inflows increase considerably.
Moody’s said the country’s external debt repayments are modest, however, low foreign exchange reserves adequacy could endanger the government’s ability to finance the balance of payments deficit and roll over external debt at affordable costs.
It highlighted due to an absence of capital inflows, the coverage of forex reserves for imports would remain below two months, which is below the minimum adequacy level of three months required by the International Monetary Fund (IMF).
The rating agency said its assessment to the country’s susceptibility to event risk was fueled by external vulnerability risk.
While talking about current account deficit, Moody’s said it would remain wider compared to 2013-16 levels, with near-term prospects for a marked and sustained revival unlikely unless good imports contract sharply.
It projected Pakistan’s current-account deficit to narrow slightly, in part as a result of the policy measures, to 4.7% in fiscal 2019 and 4.1% in fiscal 2020, from the wider-than-expected deficit of 6.1% in fiscal 2018.
The rating agency cautioned the government’s narrow revenue base restricts its financial flexibility and weighs on debt affordability since its debt burden has risen in recent years.
According to Moody’s, the government’s debt stock at 72% of GDP is higher than the 58% for B-rated sovereigns and it projected the burden to increase further and peak at approximately 76% of GDP by FY20, due to currency depreciation until it gradually declines as the twin deficits narrow.
Pakistan’s external vulnerability indicator (EVI) reading has also risen above 170% for fiscal 2019, from 84% for fiscal 2018, pointing to a marked reduction in the coverage of total external debt of the economy due over fiscal 2019 by foreign-exchange reserves, said Moody’s.
It highlighted the moderate but increasing level of external government debt also leaves the country’s finances vulnerable to sharp currency devaluations.
Notwithstanding, Moody’s said longer-term economic growth remains robust due to improvements in power supply, infrastructure and national security that have contributed to the country’s growth prospects and increased business confidence.
Especially, Pakistan’s long-term economic limitations will be fixed by infrastructure investments and the major rise in the power supply, including projects under the China-Pakistan Economic Corridor (CPEC) are helping with growth and strengthen its growth potential, said the rating agency.
“Combined accumulated cumulated losses at SOEs, including Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM), have risen to around Rs1.2 trillion as of the end of June 2018 (3.6% of fiscal 2018 GDP), compared with total losses across all SOEs of around Rs650 billion as of fiscal 2016 (2.2% of fiscal 2016 GDP),” the report stated.
“The state-owned power sector has also re-accumulated debt of around Rs660 billion (1.9% of fiscal 2018 GDP) – commonly referred to as “circular debt” – after having cleared them in the 2013-16 IMF program, because of lower tariffs charged by the distribution companies relative to the price they pay for the power through power purchase agreements, transmission losses that reduce the amount of electricity that can be sold, and nonpayment by customers,” said Moody’s.
And institutional reforms being mulled by the government if effectively executed could enhance institutional strength, which has risen in recent years with greater central bank autonomy and monetary policy effective, said Moody’s.
But the rating agency warned the reforms would be challenging for any government to go through due to the country’s large bureaucracy and federal-provincial politics and administrative arrangements.
