Pakistan’s fiscal deficit to reach 4.8 percent of the gross domestic product, during the current fiscal year whereas depreciation of domestic currency to increase inflation and increase borrowing costs.
Moody’s in a report released on Friday under the theme Contagion risks greatest where external vulnerability, weak debt affordability meet low policy credibility, discussing several countries also allocate a small part on Pakistan.
Moody’s said that Pakistan is facing elevated external pressures stemming from strong domestic demand and capital-import heavy investments related to the China-Pakistan Economic Corridor (CPEC).
“We expect a current account deficit of 4.8 percent of GDP this year. While reserve coverage of external debt repayments remains adequate, we expect that coverage to weaken, the report said.
Unless capital inflows increase substantially, possibly through and in combination with an IMF program, we see elevated risk of further erosion in foreign exchange reserves.
Around one-third of government debt is denominated in foreign currency. Pakistan s gross borrowing requirements are among the highest among rated sovereigns at around 27-30% of GDP. This is driven by persistent fiscal deficits and the government s reliance on short-term debt, with an average maturity of 3.8 years.
Although Pakistan is not a major recipient of volatile capital inflows, local currency depreciation could raise inflation and prompt additional domestic rate hikes, which would pass through to borrowing costs and further weaken the government s fragile fiscal position.
“We find that Pakistan s debt affordability would weaken significantly from already low levels in the event of a sharp and sustained increase in the cost of debt”, the report said.