The dollar going up could make it harder for Pakistan to repay its debts, warns Moody’s

August 25, 2018

Photo: Reuters

Moody’s Investors Service said on Friday that Pakistan is among the top countries most vulnerable to dollar appreciation. This means that it would be harder for Pakistan to repay its foreign loans.

Assessing frontier and emerging markets based on their balance of payment situation and foreign exchange reserves, the New York-based investors’ service said Pakistan is facing even higher external pressures. This is because of a high domestic demand and heavy investment in the China-Pakistan Economic Corridor that resulted in higher imports and widened the trade gap to $18 billion as imports exceed exports.

This trade deficit is likely to touch 4.8% of the GDP this year, Moody’s warned.

Pakistan’s gross borrowing requirements are among the highest on Moody’s list, around 27 to 30% of its GDP, because of the government’s heavy reliance on short-term borrowing. Around one-third of the government debt, which stands at around Rs27 trillion, has to be paid in dollars.

Any sharp and sustained increase in the dollar would significantly weaken Pakistan’s debt affordability, meaning its ability to pay back its debts.

Foreign reserve coverage of external debt repayments is $10.23 billion, barely enough to pay for a month-and-a-half worth of imports. Improving dollar reserves is essential, which could be achieved through and in combination with an IMF programme, it said.

The sovereign ratings agency also warned that a weak rupee could lead to higher inflation and prompt the central bank to increase interest rates, which could weaken the government’s already fragile fiscal position.

 
 

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