Due to low exports and a lack of foreign direct investment, Pakistan and Sri Lanka are among the South Asian countries most vulnerable to balance of payments (BoP) crises, according to Moody’s Investors Service.
Moody’s Report on Pakistan and Other Asian Countries BoP Crises
Moody’s said in its most recent report that Pakistan, Sri Lanka, Bangladesh, and India have very low exports as a share of their respective GDPs and receive little foreign direct investment (FDI).
This indicates that the countries are “not well integrated in global value chains.”
It stated that low levels of trade openness and FDI make South Asia more vulnerable to shocks and limit longer-term growth prospects, which can lead to social risks.
Pakistan and Sri Lanka are the Most Vulnerable
“Pakistan and Sri Lanka are most vulnerable among the four sovereigns [to BoP crises],” the report said.
“Both have experienced significant BOP pressures because of very low exports and FDI, combined with much weaker policy management and higher political risk.”
According to Moody’s, India is the least vulnerable to BoP crises due to its larger and more diverse export sector, and New Delhi also has better macroeconomic policy management in place.
According to the report, the main causes of a country’s export sector are restrictive trade policies and poor infrastructure.
“Bangladesh, Pakistan and Sri Lanka have much weaker infrastructure compared with India, contributing to high costs to trade,” it said.
Furthermore, adding that South Asian nations’ market access to other countries is limited on account of them having fewer trade agreements.
According to Moody’s, low trade openness will weigh on growth potential and the ability to create jobs, as well as increase social risks.
“This will affect all four countries,” the report said. “But, Bangladesh, India, Pakistan face greater challenges than Sri Lanka as young and growing populations necessitate the creation of significant numbers of jobs every year.”
According to the report, South Asian countries will need a long-term commitment to “difficult reforms” in order to realize their export potential.
“We believe that South Asian sovereigns are unlikely to realize their export potential, at least not in the near to medium term,” Moody’s said.
“Policies that are inconsistent with a more outward-oriented position have been in effect for several decades and cannot be quickly overcome.”
To read our blog on “Pakistan’s fiscal growth will slacken in FY23 due to Economic and Political uncertainty, Moody’s,” click here.