Hurdles in Pakistan’s Credit Rating

Pakistan’s failure to do population planning comes back to haunt the country.

Impediments refuse to leave Paki­stan unattended. On February 27, Moody’s Investors Service, a glob­al integrated risk assessment firm that empowers organizations to take better decisions, issued a report on Pakistan’s long-term credit rating. Moody’s not only kept the rating unchanged at Caa3, but it also identified hurdles (political and economic) in the way of improving Pakistan’s credit status.

In the Moody’s lexicon, the Caa3 rank­ing is a jinx, for its being considered poor standings of a country subject to very high credit risk. Pakistan has been at this footings since February 2023, when Moody’s downgraded Pakistan’s rating from Caa1 to Caa3, thereby declaring “very high liquidity and external vulner­ability risks” attached to dealing eco­nomically with the country.

For Pakistan, the immediate concern is to negotiate the availability of the remaining third tranche amounting to $1.1 billion in this month from the on­going Standby Agreement with the In­ternational Monetary Fund (IMF). In this month, Pakistan would be facing the challenge of securing the tranche in the face of allegedly rigged elec­tions – the exercise which divided the country. Form 45 representing the will of voters has lost their battle to Form 47 representing the dictate of the state machinery.

Nevertheless, the main implication of the Moody’s report is to assess invest­ment risks for any international loan donating organizations such as the IMF and others, before they enter into any agreement with Pakistan, especially in the long term. This is where the rub lies. From April to June, rounds of nego­tiations are expected between Pakistan and the IMF. Parleys would be done by the newly formed coalition government, while fighting for its own legitimacy. The government’s preference would be to demand a loan amounting to at least $6 billion for four or five financial years, starting from July 1, 2024.

To elaborate, Pakistan may be ask­ing for an Extended Fund Facility (EFF) to overcome medium-term crisis of the balance of payments owing to structur­al weaknesses which require time to ad­dress. In 2021, Pakistan deviated from its commitments made to the IMF, there­by losing the IMF’s trust. Pakistan was penalized for the misadventure. This time, however, Pakistan may be show­ing its willingness to identify new ar­eas (such as real estate and retailers) to collect revenue, and implement medi­um-term structural reforms which could permit a longer repayment period.

Ostensibly, Pakistan is eager to enter­ing into a long term engagement with the IMF, considering it an organization of the last resort. Along with the EFF, Pakistan may be asking for the Extended Credit Facility (ECF), which is medium-term fi­nancial assistance, to deal with the bal­ance of payments problems. The ECF is available to poor countries which are struggling to reduce poverty. For the past some years, environmental catastrophes such as rains and floods have been over­running Pakistan’s south, plunging the country into the poverty trap.

The availability of both the EFF and ECF depends upon the way Pakistan shows willingness to do its part of the job: introducing structural reforms through taxation and privatization, be­sides reducing expenditures. A ma­jor challenge would be that a weak co­alition government would be formed to negotiate with the IMF – to secure a huge loan from the IMF, which would impose tough conditions.

Through its rating mechanism, Moody’s avowal to alarm the world of Pakistan’s higher probability of default and a greater degree of investment risks is a caveat that Pakistan has to conquer. Pakistan has to show that its potential to afford debt is higher than what is ad­umbrated by the Moody’s. Nonetheless, a picture is clear to everyone. With high debt-servicing liabilities, Pakistan’s hav­ing room for fiscal flexibility has been shrunk, thereby making the country in­capable of undertaking key expendi­tures on infrastructure and social ini­tiative. It simply means that the loan sought would not be spent on the de­velopmental projects once again. This is the point at which Pakistan and the IMF would wrestle with each other.

Pakistan’s laggard social sector (health and education) is bound to hurt Pakistan in the long run. The same is the situa­tion with the infrastructure (road, sew­erage, water channels) area. Pakistan’s misplaced spending priorities have dis­affected its population, which uses all means available at its disposal to evade taxation. The recent attempt to maneu­ver the general elections has added fuel to the proverbial fire by disenfranchising the voters, who thought that they could chart their future through the ballot box.

Since the time Pakistan has taken its eyes off the population sector, the crisis of overpopulation has gone grim. Paki­stan’s failure to do population planning comes back to haunt the country.

Nevertheless, privatization would mean reduction in the size of sovereign­ty. Selling assets to run the country may be feasible in a country which reduces its expenditures especially non-devel­opment one. However, Pakistan is in no mood to do so. Money got through priva­tization is spent quickly. Interesting­ly, Pakistan is hoping against hope from prospects of foreign investment in the agriculture sector.

The major challenge for Pakistan is how to make itself investor friendly. The facility of the ease of doing business is applicable to both local and foreign in­vestors. If local investors are disinclined to invest, foreign investors would never prefer Pakistan. The fear of political in­stability is still running high, making the country unsuitable for foreign invest­ment. Before achieving economic stabil­ity, achieving political stability would be a huge challenge. Instead of resolving the issue, Pakistan has enhanced the chal­lenge and has fallen a pray to.

To offer space for the ease of doing business, Pakistan has to improve the performance of its judiciary, which is mostly entangled in wasting its time and worsening it repute by deciding on fake, fabricated and politically mo­tivated cases.

Dr Qaisar Rashid
The writer is a freelance columnist. He can be reached at

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