Moody’s upgrading of Pakistan’s rating, from Caa3 to Caa2 represents a vote of confidence in the Shehbaz government, for it has come ahead of the IMF Board of Directors formal approval of the $7 billion EFF which Pakistan has applied for. Moody’s accompanying statement does mention the staff level agreement reached in July between the IMF team and the government. This is an indication that the IMF BoD will indeed come though, for if there was any doubt, Moody’s would probably have held back. It is worth noting that Moody’s upgrade became likelier ever since Fitch’s upgraded Pakistan to CCC+ (from CCC) in July, also mainly because of the staff-level agreement, but also because Pakistan had successfully completed the Standby Arrangement in the last fiscal year. Th3e third global credit-rating agency, Standard & Poor, maintained Pakistan at CCC+ in July. While Moody’s has given Pakistan a positive outlook, Standard & Poor maintained its ‘stable’ outlook, while Fitch’s does not assign an outlook for ratings of CCC+ and below. It is also noteworthy that the news was greeted by a rise in the value of the rupee, which indicates how the underlying problem is one of foreign exchange availability.
The improvement in the rating means that Pakistan will be able to get better interest rates on its loams. There does seem to an element of Catch-22 in this, as a downgrade, by increasing the cost of borrowing, would make countries more liable than defeauly. However, the rating agencies also have to provide an objective service, and cannot afford to be too wrong. Pakistan would also be pleased with Moody’s assessment that the danger of default has receded, True, it has not disappeared, but the alarmist calls that Pakistan was headed down Sri Lanka’s path seem to have died down.
Pakistan should not be too happy with the credit rating, because it means that approval of the IMF BoD will not be followed by a further round of upgrades, Not should the Pakistani taxpayer be particularly happy that the cost of borrowing from global money markets has grown less, because it merely means that the country will borrow, with the taxpayer being forced to pay the debts increase. Pakistan should look forward to the time when ratings upgrades merely recognise a vibrant economy, and are not important for a national borrowing plan.
