Moody’s downgrade of Pakistan’s five biggest commercial banks mirrored the downgrade of the country itself, but it still cannot be shrugged off. The downgrade, from stable to negative, does not yet take Pakistani paper into the category of junk bonds, but that is the direction in which matters are feeding. One major reason for this id the trouble that Pakistan has been having with the International Monetary Fund (IMF). Not being on the Fund programme means that benchmarks have been missed, which is why the downgrade has occurred. The downgrade itself would mean that Pakistan would find it that much pricier to approach the international financial markets. Not only has Pakistan floated its bonds on the markets, but it has tapped the Islamic banking market by issuing sukuk bonds. It has financed this paper by issuing fresh banks whenever they fall due. After the downgrade, it will find it more expensive to do so, with a higher interest rate having to be paid than if the IMF programme was restarted. Being on the FATF grey list will not be helpful either.
Maintaining the present ratings, which are of course nothing to write home about, will require the country to win the IMF ‘Seal of Good Housekeeping’ so that other financial institutions can be assured that Pakistan is no more a credit risk. The present government has already taken some of the more difficult measures demanded by the IMF, and in the Budget being unveiled today, is expected to take more. While such steps put a huge burden on the consumer, they do reflect the economists’ consensus about what is needed. It has been noted that the IMF doubles as a a kind of rating agency, and such ratings as Moody’s has revised, merely reflect the IMF’s views. However, that also means that the IMF must be given due weightage in such activities as budget-making. The government will have to get back on the IMF ESAF before it can hope for the kind of upgrades it needs for the cheap money it needs.
