Moody's decision to downgrade Pakistan's rating from stable to negative B3 was anticipated given that these ratings are largely determined by a country's external account position. Since the last fiscal year, Pakistan has been experiencing a constantly deteriorating current account deficit, to the tune of 16 billion dollars at last count, as well as a depleting foreign exchange reserve position with a 2.5 billion dollar loan repayment due this month. Foreign indebtedness has reached an alarming 70 percent of Gross Domestic Product according to the reported briefing given by the Ministry of Finance officials to the Caretakers prompting Moody's to note that unless capital inflows increase significantly foreign exchange reserves are unlikely to be replenished. Unfortunately, however, the hype created by the expected inflows under the China Pakistan Economic Corridor has not translated into significant Chinese disbursements with the State Bank of Pakistan revealing that foreign direct investment fell by 1.3 percent during the past 11 months of the current fiscal year and attributed the fall to the "political uncertainty". Furthermore, any hope of shoring up the depleted reserves through the much touted Tax Amnesty on declaration of undeclared foreign assets seems to be fading because of the government's inexplicable failure to notify the scheme and rules for the 'Bonds' that are a part of the amnesty scheme and the most attractive option out of the three options available.

And perhaps the last straw on the back of the economy is the fast eroding rupee value, that had been shored up by Ishaq Dar's constant interventions in the market - which, so claims the Caretaker Finance Minister - is not sustainable and the market must be allowed to determine the rupee value. Claims by Dar that abandoning the rupee to market conditions would lead to a massive erosion of the rupee value, a view that he almost gleefully stated on national television from his almost nine-month sojourn in London, reflect his understanding of the extent of the damage he did to the national currency through his flawed policies, including (i) a focus on a deficit reduction instead of balancing it with growth; (ii) encouraging borrowing by state-owned entities (SOEs) and allowing them to pass on the interest to the hapless consumers and productive sectors which, in turn, led to the inability of exporters to compete internationally; (iii) adhering to a policy of nepotism in appointments that led to sustained bleeding of these SOEs; and (iv) understating debt by redefining it, referring to debt equity as simply equity, and borrowing heavily from the banking sector abroad at high rates of interest and low amortization period.

Thus the state of Pakistan's economy is under considerable pressure. The Caretaker Finance Minister balanced her assessment during her maiden press conference by pointing to a 5.8 percent growth rate as a positive element, with the objective of maintaining her non-partisan credentials, yet she must surely be aware that the Pakistan Bureau of Statistics data has been repeatedly and credibly challenged by this newspaper as well as independent economists. With the end of the fiscal year on 30 June fast approaching and with the budget deficit expected to be close to what the PML-N administration inherited notably in excess of 8 percent of GDP, unsustainable by any count, there are compelling reasons for the Caretakers to undertake measures designed specifically to arrest the haemorrhage on multiple fronts but particularly with respect to our external account. Business Recorder fully supports this and urges the caretakers to get a dispensation from the Supreme Court to undertake appropriate mitigating measures with the aim of not being accused of casting the die against the elected government.

There is a consensus amongst non-partisan economists that the country is headed towards another International Monetary Fund (IMF) programme given the difficulties associated with borrowing from other sources at this juncture. Additionally, the decline in Moody's rating would imply issuing sukuk/Eurobonds at well above the available market rate of return and heavy reliance on borrowing from foreign commercial banks is not sustainable that accounts for the Abbasi-led administration's rising reliance on borrowing from China. However, this time around the IMF conditions would be even more politically challenging than previously and that is the argument that the Caretakers can put forth: that while the decision to borrow from the IMF must rest with the next elected government yet it has begun to take politically challenging decisions during their short tenure otherwise the situation would further deteriorate with major implications on the state of the economy as well as the quality of life of the electorate.

Copyright Business Recorder, 2018