Pakistan is the most vulnerable South Asian sovereign to BOP crises, according to Moody’s Investors Services.
In its most recent report, “Sovereigns: South Asia,” the rating agency It has been argued that limited trade openness increases susceptibility to disruptions and hinders long-term growth. Specifically, among the four sovereign nations, Pakistan and Sri Lanka are the most vulnerable.
“Both have been subject to substantial BOP pressures as a result of extremely low exports and FDI, in addition to considerably weaker policy management and increased political risk.” Moody’s stated that India is the least vulnerable country due to its diversified and sizable export sector, as well as its effective management of macroeconomic policy, which has enabled the country to amass and sustain sufficient foreign exchange reserves.
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“Inadequate foreign exchange reserves to cushion against shocks have resulted from their low trade openness, poorly diversified export baskets, inadequate macroeconomic policy management, and elevated political risks.” “India is the least vulnerable nation due to its diversified and sizable export sector, in addition to its effective management of macroeconomic policy, which ensures adequate foreign exchange reserves,” the report continued.
In comparison to India, Pakistan and Sri Lanka have significantly inferior infrastructure, which contributes to high trade costs.The credit rating agency says Pakistan and Bangladesh have the lowest South Asian exports, 10.5% and 12.9% of GDP, respectively.
With more evolved service export sectors, Sri Lanka and India export 21.5% and 22.4% of their respective GDPs, respectively.
Pakistan Expot Potential:
Pakistan possesses an export potential that is approximately six times its present export volume. However, Bangladesh, India, and Sri Lanka have export potentials two to three times their current volumes.
These traits, together with inadequate fiscal policies, increase Pakistan and Sri Lanka’s macroeconomic imbalances and incapacity to adapt to external shocks.
Both nations have substantial government fiscal deficits and low saving rates, which fuel current account deficits.
Moody’s says domestic political concerns inhibit policymaking and FDI for reserve creation and maintenance. As a result, their limited participation in global value chains is a consequence of inadequate FDI. Net FDI inflows averaged 0.6% and 1.0% of GDP in Pakistan and Sri Lanka from 2013 to 2022.
In 2022–23, the credit profiles of Pakistan and Sri Lanka significantly deteriorated. Strong import demand resulted from expansionary fiscal policies that occurred concurrently with a global commodity price upheaval.
Worldwide Financial Conditions:
Concurrently, worldwide financial conditions became more stringent. Due to these factors, their foreign exchange reserves plummeted, and current account deficits increased rapidly.
From $2.6 billion in May 2023, one month of imports, to $7.5 billion in October, Pakistan’s forex reserves rose.
In December 2022, Sri Lanka’s reserves fell from $2.7 billion to $1.9 billion. With more reserves than Pakistan and Sri Lanka, Bangladesh’s credit profile weathered the early 2022 global energy price shock.
Pakistan’s cascading tariffs are among the harshest in the world, encouraging export substitution, according to the World Bank. Labelling and administrative fees and other non-tariff trade restrictions are common in South Asian sovereigns, encouraging export substitution.
Bangladesh, Pakistan, and Sri Lanka lag in political stability, governance, trade infrastructure and policies, and labour quality. It added that their weaknesses will hinder their export industry development and diversification.
Moody’s said all three countries have macroeconomic imbalances that limit infrastructure and education investments to boost external sector growth.
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