Bangkok--13 Jun--Moody's Investors Service According to a new report from Moody's Investors Service, sharply widening deficits in Pakistan's fiscal and current accounts are reversing a multi-year trend of fiscal consolidation and debt reduction. Concurrently, renewed political discord is unlikely to provide the stable and orthodox policy framework necessary for quickly limiting these macroeconomic imbalances. The report also highlights growing reliance by the government on short-term central bank financing of budgetary operations which has heightened inflationary pressures. "These have resulted in a deterioration of important credit-metrics, which led to the downgrade of Pakistan's sovereign bond ratings from B1 to B2 in May 2008," said Aninda Mitra, a Moody's VP / Senior Analyst and author of the report. "Despite the strong investment-driven economic growth of recent years, Pakistan's economic base is narrow and somewhat prone to macroeconomic instability" said Mitra. "These vulnerabilities are compounded by the government's stagnant tax base that weighs on the country's low national savings and hinders domestic financing of the sizable budget deficits," he added. Other serious problems highlighted by the report as reasons for the sovereign bond rating downgrade to B2 are Pakistan's weak governance, embedded political tensions and weaknesses in the rule of law. "These factors have weakened the scope for strengthening institutions and sustaining policy adjustments, while also heightening the risks of sudden shifts in private investor confidence," notes Mitra. Mr. Mitra drew attention to Pakistan's investment friendly policy regime and large inflows of foreign direct investment as well as remittances from overseas Pakistani workers. However, he also noted these inflows were not strong enough to offset weak export performance or adequately finance the widening trend in the current account deficit. The report also notes that the stable outlook on Pakistan's B2-rated government bonds reflects the structure of government debt which largely consists of long-tenor credits from official bilateral and multilateral creditors, which adds stability and reduces rollover risks. Additionally, the prospect of external assistance from bilateral donors and multilateral institutions is expected to provide some degree of balance of payment and budget support. Further sustained macroeconomic adjustments, however, are still needed to shore up credit fundamentals and ease pressure on the State Bank of Pakistan (SBP), the country's central bank, the report notes. The report, entitled, "Pakistan: 2008 Credit Analysis," can be found at www.moodys.com .