Daily Times

Since its inception in 1947, Pakistan has faced a series of economic challenges, marked by political instability, military interventions, and external pressures. The country’s journey from a fledgling state to a nation striving for economic stability has been anything but smooth. The recent enhancement of Pakistan’s credit rating by Moody’s Investors Service is a significant milestone in this journey, reflecting a complex interplay of historical events, economic policies, global influences, and international relations.

In late August 2024, Moody’s upgraded Pakistan’s credit rating from Caa3 to Caa2, with an outlook change from stable to positive. This marks a reversal from February 2023 when Moody’s had downgraded Pakistan’s rating due to severe economic strains, including dwindling foreign exchange reserves and a looming balance of payments crisis. The current Caa2 rating, while still within the high-risk category, indicates reduced default risk and improved macroeconomic conditions, largely attributed to the recent IMF agreement and the doubling of Pakistan’s foreign exchange reserves to approximately $9.3 billion since June 2023.

Historically, Pakistan’s highest credit rating was achieved in the early 2000s, with a BB – from Standard & Poor’s, reflecting cautious optimism during a period of economic reform under President Pervez Musharraf. During this time, Musharraf’s government undertook significant economic reforms, including liberalizing the economy, privatizing state-owned enterprises, and attracting foreign investment. The stability and growth during this period led to a favorable credit rating, signaling international confidence in Pakistan’s economic management.

However, this rating declined rapidly in subsequent years due to political instability, mounting external debt, and economic mismanagement. The transition to democratic rule in 2008, while a positive step politically, brought economic challenges. The Pakistan People’s Party (PPP) under Asif Ali Zardari faced significant economic difficulties, including energy shortages, inflation, and a ballooning fiscal deficit. By 2012, Pakistan’s credit rating had fallen to B-, reflecting the deteriorating economic conditions and the inability of the government to implement effective reforms.

The economic history of Pakistan since its creation is a testament to the complexities and challenges of managing a nation with diverse needs and a constantly shifting geopolitical landscape. The early years of Pakistan’s existence were characterized by an agrarian economy, with a nascent industrial sector and an overreliance on external aid, particularly from the United States during the Cold War era. This aid, while providing short-term relief, entrenched a dependency that would later become a critical issue in Pakistan’s economic stability.

The 1960s were marked by a period of significant economic growth under President Ayub Khan, often referred to as the “Decade of Development.” This era saw the implementation of the Green Revolution, which significantly boosted agricultural productivity, and industrial policies that fostered the growth of key sectors. However, the benefits of this growth were not evenly distributed, leading to growing economic disparities, particularly between East and West Pakistan. This economic inequality played a significant role in the political unrest that eventually led to the secession of East Pakistan and the creation of Bangladesh in 1971. This event was a major setback for Pakistan, both economically and politically, and significantly affected its international standing and economic trajectory.

The 1970s brought a shift towards socialist economic policies under Prime Minister Zulfikar Ali Bhutto, who implemented widespread nationalization of key industries. While these policies were intended to reduce inequality, they led to inefficiencies and a decline in industrial productivity. The economic turmoil of this period was compounded by political instability, culminating in a military coup in 1977 that brought General Zia-ul-Haq to power. Zia’s regime implemented a series of austerity measures and structural adjustments, often under the guidance of international financial institutions like the International Monetary Fund (IMF). These measures, while necessary for economic stabilization, were deeply unpopular and led to further political and social unrest.

The 1980s and 1990s were marked by alternating civilian and military governments, each grappling with significant economic challenges. The decision to conduct nuclear tests in 1998 in response to India’s tests led to international sanctions, which further strained Pakistan’s already fragile economy. The early 2000s saw some economic stability under President Pervez Musharraf, who implemented a series of economic reforms and secured significant foreign investment, particularly in the aftermath of Pakistan’s strategic alliance with the United States in the War on Terror. However, the global financial crisis of 2008, coupled with domestic challenges such as energy shortages and a growing current account deficit, quickly eroded these gains.

In the last decade, Pakistan’s economic narrative has been dominated by efforts to stabilize the economy through structural reforms, debt management, and attempts to attract foreign investment. The China-Pakistan Economic Corridor (CPEC) has been a significant development, promising infrastructure investment and economic growth. However, concerns about debt sustainability and the lack of transparency in CPEC projects have raised questions about the long-term benefits of these investments.

The recent upgrade of Pakistan’s credit rating by Moody’s reflects several critical factors. First, Pakistan’s successful negotiation of a $7 billion IMF Extended Fund Facility (EFF) has provided much-needed external financing, reducing immediate liquidity pressures. This agreement was crucial in stabilizing the economy, as it helped to restore investor confidence and provided a framework for structural reforms aimed at improving fiscal discipline and economic governance. The IMF program is expected to unlock additional financing from other multilateral and bilateral partners, which will be essential for meeting Pakistan’s substantial external financing needs, estimated at around $26 billion for fiscal year 2025.

Second, the government has made significant efforts to broaden its revenue base by implementing tax reforms aimed at previously untaxed sectors, such as agriculture and retail. These reforms are critical for improving Pakistan’s debt affordability, which remains a significant concern. According to Moody’s, interest payments are expected to consume about half of government revenue over the next few years, underscoring the importance of increasing revenue to ensure fiscal sustainability. The government’s efforts to increase revenue have been supported by measures to improve tax compliance and expand the tax base, although challenges remain in fully implementing these reforms.

The implications of this credit rating upgrade for Pakistan are significant. A higher credit rating typically reduces the cost of borrowing, making it easier for the government and private sector to finance development projects and attract foreign investment. For Pakistan, which has struggled with high levels of external debt and a persistent current account deficit, the ability to borrow at lower interest rates is a critical factor in maintaining economic stability. The upgrade also signals to international markets that Pakistan is on a path toward greater economic stability, potentially leading to increased investor confidence and greater access to international capital markets.

However, the challenges ahead are substantial. Moody’s has cautioned that Pakistan’s debt affordability remains weak, with interest payments expected to consume about half of government revenue over the next few years. This high debt burden, coupled with political uncertainties and the risk of social unrest from reform implementation, could hinder further progress. The recent positive outlook reflects a balance of risks, with potential upside if Pakistan can continue to implement reforms and secure timely external financing. However, the path to sustained improvement in Pakistan’s credit rating will require continued fiscal discipline, structural reforms, and a stable political environment. The global perspective on Pakistan’s economic journey is also crucial to understanding the broader implications of its credit rating. Over the years, Pakistan’s economic policies have been influenced by its geopolitical significance, particularly in the context of its relationships with global powers such as the United States, China, and the Gulf States. The Cold War era saw Pakistan align closely with the United States, receiving substantial economic and military aid in return for its strategic support against the Soviet Union. This relationship, while beneficial in the short term, led to a dependency on external aid that has persisted over the decades.

In more recent years, Pakistan’s economic and strategic pivot towards China, particularly through the China-Pakistan Economic Corridor (CPEC), has been a significant factor in its economic narrative. CPEC has brought much-needed infrastructure investment to Pakistan, but it has also raised concerns about debt sustainability and the long-term impact of Chinese influence on Pakistan’s economy. The international community, including rating agencies like Moody’s, closely monitors these developments, as they have significant implications for Pakistan’s economic stability and creditworthiness.

The political dynamics within Pakistan have also played a crucial role in shaping its economic trajectory. The fluctuations in Pakistan’s credit rating often mirror the political landscape, with periods of military rule generally associated with more disciplined economic management, albeit at the cost of democratic governance. Civilian governments, while more democratic, have struggled with corruption, inefficiency, and political instability, which have negatively impacted economic performance.

For instance, during the rule of the Pakistan Muslim League-Nawaz (PML-N) under Nawaz Sharif from 2013 to 2017, Pakistan saw a period of economic growth and stability, with efforts to address the energy crisis and improve infrastructure. However, political scandals and subsequent disqualification of Nawaz Sharif from office led to instability, which, coupled with rising debt levels, contributed to a decline in economic confidence and credit ratings.

Similarly, the Pakistan Tehreek-e-Insaf (PTI) government under Imran Khan faced significant economic challenges upon taking office in 2018. Despite initial optimism and promises of reform, the government struggled to manage the economy effectively, leading to a reliance on IMF programs and a subsequent downgrade in Pakistan’s credit rating. The political turmoil that followed Imran Khan’s ouster in 2022 only exacerbated the economic challenges, leading to further downgrades and increased economic uncertainty.

Looking forward, Pakistan must focus on sustaining its reform efforts, improving governance, and ensuring political stability to maintain and enhance its credit rating. Achieving this will require a delicate balance between fiscal consolidation and social stability, as well as continued support from international partners. The road to economic resilience is long, but with sustained effort, Pakistan can continue to improve its standing in global financial markets and secure a more stable and prosperous future. The upgrade to Caa2, while a positive development, should be seen as a step on a much longer journey toward economic stability. For Pakistan, the challenge now is to build on this momentum, address its structural weaknesses, and create a more inclusive and sustainable growth model that can withstand both internal and external shocks. The stakes are high, but the potential rewards of achieving a stable and resilient economy are even higher, not just for Pakistan’s government but for its people, who stand to benefit the most from sustained economic growth and stability.

In conclusion, Pakistan’s journey from economic uncertainty to a more stable and resilient economy is a testament to the nation’s ability to adapt and persevere. The recent enhancement of the credit rating by Moody’s is a positive development, but it is not the end of the journey. Continued efforts to strengthen the economy, address structural weaknesses, and build a more inclusive and sustainable growth model will be essential for Pakistan to achieve long-term economic stability and prosperity. The road ahead is challenging, but with the right policies and a commitment to reform, Pakistan can continue to improve its credit rating and secure a brighter economic future.

The writer is a financial expert and can be reached at jawadsaleem.1982@gmail.com. He tweets @JawadSaleem1982.