The call of the bell

Spearhead Analysis – 29.01.2015

By Enum Naseer
Senior Research Analyst,
Spearhead Research


As expected, the international credit rating agency, Moody’s has taken note of the recent petrol crisis in Pakistan for its ominous repercussions on the country’s overall creditworthiness. Moody’s had formerly upgraded the country’s outlook from “negative” to “stable” after expressing its satisfaction with the reform process back in 2014. However, in wake of the current paralysis vis-à-vis structural reform, Moody’s has expressed its concerns about the future of Pakistan’s credit profile leading us to believe that the government’s lax attitude towards reform (which allowed the circular debt problem to gain momentum in the first place) “will further strain Pakistan’s budget and balance of payments, a credit negative…fuel shortages also reflect the strained finances of state-owned distribution companies and the fuel importer, Pakistan State Oil corporation, and are a setback to the sector’s progress on reforms made so far under Pakistan’s financial support program with the International Monetary Fund.”

If this policy inaction is allowed to continue, Pakistan’s ability to pay off its dues to the IMF after having struck a deal allowing the inflow of $6.6bn to the country will be severely impacted. The lending institution too is also monitoring Pakistan’s progress on its promise of embarking on a course of radical economic reforms especially in the energy and taxation sectors. The fuel fiasco finds no parallel in Pakistan’s history despite the fact that the country has had to deal with unconventional challenges since its inception: this time around, life came to a practical standstill as banks refused to underwrite LCs for PSO due to non-payment of dues. The health of PSO is of immense importance—by virtue of its role being interwoven into the financial sector it can have far-reaching effects on Pakistan’s banking sector as well which has generally been doing well of late.  Increasing oil supplies is desirable at a time when the commodity is trading at a low price in the international market but should come with an appreciation of the fact that the market remains fickle and prone to the impact of multiple endogenous and exogenous factors. Perhaps, at a time when supply is high and demand is low, a rethink followed by concerted efforts to push for course correction is necessary. The goal of lessening the fiscal burden in the long run will be achieved through implementation of a plan that is futuristic and takes into view the country’s vulnerabilities and strengths. The idea should be to look to disallow such a crisis from erupting in the future by ensuring efficiency within the power/oil supply chain by putting in place systems and processes that prevent bottlenecks and allow smooth operation.

Electricity tariff adjustments and tax reforms should be implemented on an immediate basis. The incumbent government should be pushed to make good on its promises given that it had assured the masses of having a blueprint ready to take the country towards economic progress even before the PPP government had hung its gloves. For a country that relies heavily on help from international donor agencies to keep afloat, this is a most precarious position to be in: having to live in constant fear that something or the other, at some point in time is going to give way and cause its very foundations to crumble. The alarm bells are blaring, the country is hungry for a change of ways: who is going to heed the call?