SBA SUSPENSION AND S&P'S RATING

COMING OUT OF THE IMF'S PROGRAM COINCIDES WITH THE RAGE OF THE RATING AGENCY.

AMANULLAH BASHAR
(feedback@pgeconomist.com)

Nov 7 - 20, 2011

Whenever weak economies like Pakistan endeavor to remain out of the dominance of international donor agencies, the international credit agencies become active to create an impression that economies could only survive with the assistance of the donor agencies, instead of encouraging them to be more focused on domestic resources and home-grown strategies to come out of the economic crises.

Pakistan's financial minister Dr. Hafeez Shaikh has recently pointed out that Pakistan decided to suspend stand by arrangement with international monetary fund (IMF) before availing the last tranche of $3.2 billion because the country was unable to put up with the harsh and stubborn conditional pressures from the Washington-based institution.

The competent and comparatively more aggressive finance minister has also expressed his firm confidence that the domestic resources and flow of external resources from overseas Pakistanis and home remittances, if capitalized properly, could help the country rid of the burden of foreign debt and costly debt servicing.

According a leading business leader, it is the time for rebuilding the confidence and trust of the business community, professionals, bureaucrats, and politicians in the policies of the country through transparent implementations of the economic and other decisions.

The patriotic people of Pakistan keeping their wealth in foreign banks can steer the economy out of trouble leaving no space for international donors to dictate the incumbent government. However, to achieve this target, the people at the helm of affairs would have to set examples first for others to follow.

One of the areas, which need immediate attention, is the yawning gap between import and exports of the country. The trade deficit always takes away the benefits of hard-earned exports. The major chunk of precious foreign exchange goes into imports of petroleum products, which demand for finding import substitute on war footing to bridge the gap between import and exports, sources said.

It is heartening to note that the ministry of power and natural resources seems firm on the decision of importing cheaper gas from Iran for which it has formed a consortium of Pakistan and Chinese firms for financing gas pipeline projects. Once this project is materialized, it would give a much-needed relief to the daunting balance of payment issue in Pakistan. The availability of cheaper fuel on one hand would help improving industrial outputs and export surplus while it would save foreign exchange on import of costly fuel oil, which has become a great burden on the economy.

It may be noted that currently Pakistan is out of IMF program and focusing more on its own resources, which seem the cause of latest assessment by Standard & Poor's ratings, which have affirmed its 'B-' long-term and 'C' short-term foreign and local currency sovereign credit ratings. The outlook on the long-term rating remains stable. Standard & Poor's also affirmed its 'B-' issue rating on Pakistan's senior unsecured local-currency debt and its 'B-' transfer and convertibility assessment.

"In addition, we affirmed the 'B-' issue rating on the sovereign's senior unsecured foreign-currency debt, as well as its recovery rating of '3', which denotes the expectation of a meaningful recovery of 50-70 per cent in the event of a distressed debt exchange or payment default," said S&P assessment report released from Singapore last week.

"The ratings affirmation takes into account Pakistan's low income level, high public and external leverage, political and security risks, and fiscal inflexibility due to an exceedingly narrow tax base," said Standard & Poor's credit analyst Agost Benard. "These constraints are balanced against an adequate external liquidity position-largely due to the earlier IMF standby loan agreement and donor support."

Pakistan's high public and external indebtedness is a rating constraint. Standard & Poor's estimates Pakistan's net general government debt at 50 per cent of GDP in 2011, and about 40 per cent of it is external debt. Although the debt-to-GDP ratio has fallen from 74 per cent a decade ago, this was mostly due to debt forgiveness and high nominal GDP growth due to double-digit inflation in the past four years, he said.

The country's fiscal inflexibility-particularly its narrow revenue base-has been a key reason behind fiscal slippages, including missing agreed targets under the IMF standby loan agreement. The inability to implement structural revenue reforms continues to undermine public finances, and has resulted in the suspension of the IMF loan agreement well ahead of its expiry in September this year.

"The weak revenue performance also poses a direct constraint on monetary policy effectiveness, as the government is compelled to resort to borrowing from the central bank for deficit financing."

Pakistan's other rating constraints are its low income level and political risk stemming from regional insurgencies, sectarian strife, and a volatile and adversarial domestic political setting.

The country's adequate external liquidity supports the ratings on Pakistan. Buoyant remittance inflows, successive loan disbursals by the IMF, and other multilateral loans have materially reduced the risk of near-term external payment difficulties for Pakistan.

"We could lower the ratings if major slippages in policy occur, resulting in renewed balance-of-payments difficulties or rising public debt trajectory. Conversely, we could raise the ratings if Pakistan shows progress in its fiscal consolidation efforts, manifested in moderating fiscal deficits and steady reduction in the public debt burden," Benard maintained.