International rating agency Moody's assigned a default grade rating to the government of Pakistan's local-currency-denominated bonds due to the war in Kashmir, weak investment spending and ongoing disputes with foreign investors in the power sector.
The `CAA1' rating that has been assigned reflects the serious budgetary and external payments constraints that Pakistan faces. The rating also takes into consideration conditions imposed on the government by the Paris Club to reschedule maturing Eurobonds as part of a comprehensive restructuring of its external debt.
According to Moody's, `CAA' rated bonds are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Bonds rated `Ca' represent obligations which are speculative in a high degree, the international agency said. Such issues are often in default or have other marked shortcomings, it added.
Moody's feels that the budgetary constraints will not be overcome in the current scenario. Given the state of the economy and Pakistan's foreign relations, Moody's believes that it is unlikely for the country to meet its revenue targets. Therefore, cuts in non-military and non-interest spending will have to be made. As a result of weak investment spending, ongoing disputes with foreign investors in the power sector, the war in Kashmir and flagging domestic investor confidence, Pakistan's structural problems will go unaddressed for yet another year.
This deepens Moody's concerns over the longer-term ability of the economy and the budget to service debt payments, especially after the formal rescheduling period ends in 2001
The government's fiscal accounts continue to be under strain despite its moratorium on payments to domestic creditors and restructuring of payments to external lenders. This reflects a fundamental inability of the state to mobilise adequate tax revenues. Although this has been a persistent problem in Pakistan in the last several decades, the situation has recently become extremely acute.
This is due to the severe downturn in the domestic economy, which was precipitated by the government's attempt to protect its foreign exchange reserves following the sharp reduction of bilateral and multilateral funding in the wake of the nuclear tests conducted in May 1998 and the exhaustion of alternative funding sources, either at home or abroad. sion. This draft was however not inked. MPEB has said it is prepared to set aside 1.10 times monthly billings in to the escrow account. The board has stated in its letter that it will be difficult to meet the 1.25 times criterion.
FIs are yet to respond to this letter formally. FI sources said the general consensus amongst institutions is that MPEB will have to adhere to the 1.25 norm spelt out in the model escrow document. Otherwise IPPs are not likely to get funds for the project.
An escrow account is adedicated account set aside by SEBs into which the money they have to pay to IPPs are credited. The concept of an escrow arose out of the poor financial health of the SEBs. Consequently, IPPs are not sure about whether they will receive payments for the power they sell to the SEBs. FIs have in recent times taken the line that unless such accounts are created, they will not fund power projects.
Madhya Pradesh is the state that has witnessed maximum drama on the escrow account issue. Initially, FIs and MPEB did not agree on the escrowable capacity. After, MPEB bowed to FI wishe
