Moody’s Report Flags Pakistan as Most Vulnerable to Balance of Payment Crises in South Asia

Moody’s Investors Services has identified Pakistan as the most vulnerable among South Asian nations to balance of payment (BOP) crises. According to their report, low trade openness, weak policy management, and high political risk contribute to Pakistan and Sri Lanka being the most susceptible. India, on the other hand, is deemed the least vulnerable due to a more diversified export sector and better macroeconomic policy management. The report emphasizes the impact of low exports and foreign direct investment (FDI) on Pakistan’s and Sri Lanka’s BOP pressures. Both countries face challenges such as weak infrastructure, high trade costs, and persistent current account deficits.

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Moody’s indicates that these vulnerabilities are exacerbated by very weak fiscal policy effectiveness and domestic political risks, hindering the ability to attract FDI and build foreign exchange reserves. In 2022-23, Pakistan’s credit profile significantly deteriorated, with a global commodity price shock and expansionary fiscal policies leading to a widened current account deficit and reduced foreign exchange reserves. Sri Lanka also experienced a decline in reserves. The report suggests that the South Asian sovereigns, including Bangladesh, face hurdles in political stability, governance, trade infrastructure, and labor quality compared to global counterparts. Moody’s concludes that these weaknesses hinder their capacity to diversify and develop export sectors, impacting their ability to invest in infrastructure and education.

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