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Credit risk of Pakistan – myth and reality

There has been a constant debate about Pakistan’s credit risk lately and all sorts of theories and analyses have been volunteered to make a case that the credit risk of Pakistan has been deteriorating for the last few years based on one pretext or the other — starting from abnormally high debt levels to GDP growth not being the best judge of economic progress, etc. The world economies have been getting more and more integrated over the past few years and the case of Pakistan is no different. The constant improvement in the external and internal debt mix has also contributed towards the improvement in the risk profile of Pakistan as the risk of default in case of sovereign is always driven from the weaknesses in the external accounts and servicing on its FX obligations.

The Foreign Direct Investment (FDI) is suffering across the emerging markets in any case and Pakistan is no different but it’s still doing better than emerging markets. The fact also is that the reserves had been accumulated to bridge any need that may arise to keep the situation on external account comfortable. The outlook for the next 3 to 4 years based on the shock absorbers is comfortable; however, in the meantime, the reforms are inevitable especially in the areas of exports (particularly textiles) which are all under private sector. The government has addressed the legitimate demand of exporters by rolling out the relief package and now it’s upto the exporters to focus on the ways to capitalize on it. The situation on exports front can only be arrested through the combined efforts of both public and private sectors. The FDI across emerging markets is suffering and there has actually been exodus of investment flows; however, Pakistan’s FDI flows, albeit weak, have been positive.

Pakistan’s net international investment position is relatively minor at 28.6% of GDP, compared to region’s average of 33.7%, which suggests that the risks of a balance of payments crisis are much lower, than the other countries in the region.

 

Pakistan’s current account is still in deficit, after being in brief surplus in fiscal year 2015/16, which was another contributor to the foreign exchange reserves. The reason is that surging financial account inflows, in part driven by the China-Pakistan Economic Corridor (CPEC), have enabled a sharp rise in non-oil imports, and that also predominantly includes machinery. This is a capital expense which may create some stress (and debt accumulation) in the short run but in the medium to long term, this development will only help achieve sustainable economic growth. We, as a nation, need to be patient and wait for the far reaching benefits of the development/policy decisions, which will only show up over a period of time.

While there may be ups and downs on the external account and debt to GDP ratio; however, the outlook is positive. This has been recognized across the globe as the existing economic policies of the government are for the future and driven from the need for the medium to long term prosperity and sustainable economic growth for the years to come. Pakistan’s risk premium declines as the economy expands, and over the last five years, the country risk almost halved — down from over 15% to less than 8% now and improving.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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