Moody's ad­vice

The Pak Banker - - FRONT PAGE -

Moody's In­vestors Ser­vice in its re­ac­tion on Pak­istan's gen­eral elec­tions, has said thatthe Pak­istan Tehreek-e-In­saf gov­ern­ment will have to walk a tight rope, as its plan to in­crease de­vel­op­ment and so­cial spend­ing as well as re­duce taxes will clash with the need to fur­ther tighten mone­tary and fis­cal poli­cies to re­duce eco­nomic vul­ner­a­bil­i­ties. One of top three credit rat­ing agen­cies in the world, Moody's has warned that some tough pol­icy de­ci­sions may have to be de­layed due to im­ple­men­ta­tion of elec­tion man­i­festo of the PTI.

Among other things, the agency has de­scribed "height­ened ex­ter­nal vul­ner­a­bil­ity" as a key eco­nomic chal­lenge for the new gov­ern­ment. In its view, pos­si­ble pol­icy op­tions would in­clude mone­tary and fis­cal pol­icy tight­en­ing, fur­ther ex­change rate de­pre­ci­a­tion and turn­ing to the IMF for ex­ter­nal fi­nanc­ing. Moody's has also pin­pointed the wide range of risks that may fur­ther de­lay pol­icy tight­en­ing and PTI moves to ful­fil elec­tion pledge which in­cludes in­creas­ing so­cial spend­ing, re­duc­ing taxes - as part of tax re­form plans - and low­er­ing en­ergy costs. To get out of the log­jam, the new gov­ern­ment may have to turn to the In­ter­na­tional Mone­tary Fund (IMF) to over­come these chal­lenges. Asad Umar, the man nom­i­nated to lead the fi­nance min­istry, has al­ready hinted at the IMF op­tion.

On the ba­sis of past ex­pe­ri­ence it can be in­ferred that the IMF will also ask for a steep cut in ex­pen­di­tures, an in­crease in in­ter­est rates and fur­ther de­val­u­a­tion of the ru­pee against the US dol­lar. The ru­pee has al­ready shed its value by close to 22% against the US dol­lar since De­cem­ber 2017. In this con­text it is im­por­tant to keep in mind that the PTI gov­ern­ment will face a chal­lenge in the up­per house of par­lia­ment where it does not en­joy a ma­jor­ity. It may have to reach a com­pro­mise with op­po­si­tion par­ties in or­der to in­tro­duce leg­is­la­tion. Right now, Pak­istan has to tackle a se­ri­ous chal­lenge to ar­range around $11 bil­lion in or­der to meet the ex­ter­nal fi­nanc­ing gap in the on­go­ing fis­cal year.

Pak­istan faced its high­est cur­rent ac­count deficit of $18 bil­lion in the last fis­cal year, which was equal to 5.8% of gross do­mes­tic prod­uct (GDP). The Min­istry of Fi­nance has not yet of­fi­cially re­leased the bud­get deficit fig­ures, but pro­vi­sional es­ti­mates sug­gest the deficit would re­main close to 7% of GDP or Rs2.4 tril­lion.Both the bud­get deficit and cur­rent ac­count deficit have reached un­sus­tain­able lev­els, which Pak­istan can­not af­ford due to low level of of­fi­cial for­eign cur­rency re­serves at $9 bil­lion and low tax-to-GDP ra­tio, stand­ing at only 11.1% by the end of 2017-18.PTI's plan to lower the num­ber of taxes and their rates to im­prove the coun­try's com­pet­i­tive­ness will make it dif­fi­cult to achieve fis­cal con­sol­i­da­tion in its ini­tial years. PTI also plans to lower the cost of do­ing busi­ness by de­creas­ing en­ergy cost.

In the longer term, Pak­istan's credit chal­lenges in­clude the coun­try's very low global com­pet­i­tive­ness, in­sti­tu­tional weak­nesses re­lat­ing to gov­er­nance, rule of law and con­trol of cor­rup­tion and a nar­row tax base. How­ever, the sil­ver lin­ing on the horizon is the on­go­ing im­ple­men­ta­tion of the China-Pak­istan Eco­nomic Cor­ri­dor which will bring about im­prove­ments in power sup­ply and in­fra­struc­ture. This in turn will raise eco­nomic com­pet­i­tive­ness and boost in­dus­trial ac­tiv­ity. Another plus point is the anti-cor­rup­tion plat­form on which PTI con­tested the elec­tion. The anti-cor­rup­tion pol­icy has the po­ten­tial to ad­dress some long-stand­ing in­sti­tu­tional weak­nesses and im­prove gov­er­nance.

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