Pakistan’s Falling Credit Rating Reflects Dire Economic Situation


Pakistan may have received the next tranche of the IMF loan and the markets may have temporarily stabilized but the economic crisis remains. Just recently Moody’s Investor Service cut Pakistan’s sovereign credit rating by one notch to Caa1 from B3, citing increased government liquidity and external vulnerability risks, following the devastating floods that hit the country.

According to Moodys “The decision to downgrade the ratings to Caa1 is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022. The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit. Debt affordability and a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future”.

According to Moodys “Pakistan’s economic outlook in the near and medium term had sharply deteriorated because of the floods. Government’s initial estimates of economic cost of the floods stood at about $30 million — which accounts to 10 per cent — of the gross domestic product (GDP) and was far above the $10 billion economic loss during the 2010 floods.”

The Finance Ministry “strongly contested Moody’s rating, saying that it was announced without prior consultations and meetings with the government and the State Bank of Pakistan (SBP).”

However, most analysts agree that Pakistan’s economy is on a downward spiral. Instead of being defensive and defending its actions, the government needs to undertake structural reforms in various sectors and open trade with its largest neighbor India.


Author: Ali Chughtai