External vulnerability index of countries

An External Vulnerability Index (EVI) has been constructed perhaps for the first time to highlight the variation in the risk among countries in meeting their external payment obligations. This also enables determination of the extent of validity of credit rating by different agencies of countries.

The construction of the index has proceeded in two steps. First, countries were identified from ratings by Standard and Poor’s, Moody’s, Fitch, etc., which were rated in the low category of B, C or even lower. Second, an index of external vulnerability was constructed by use of different indicators which are described below.

The ratings currently of countries with of B–, or C has led to the identification of 21 countries. However, only 15 countries with population above 5 million have been included in the analysis. These 15 countries are listed below by continent:

Asia: Pakistan, Sri Lanka, Tajikistan

Africa: Angola, Cameron, Ethiopia, Ghana, Nigeria, Zambia

Latin America: Argentina, Ecuador, El Salvador, Nicaragua

Europe: Belarus, Ukraine.

Among these countries, ten have a rating of B–, and five of C.

Following the identification of countries with low credit ratings the EVI has been constructed with the use of the following indicators:

• Current Account Deficit as % of GDP

• External Debt as % of GDP

• External Debt as % of Exports

• Debt Servicing as % of Exports

• Short-Term Debt as % of total External Debt

• Reserves as % of External Debt

The source of data is the publication, International Debt Statistics, of the World Bank. The publication for 2022 has recently been released which contains data up to the end of 2020. This year’s values of the above indicators have been used for construction of the EVI.

The methodology used has been to determine maximum and minimum values of each indicator. Within this range, each country in a particular indicator has been assigned a value of 0 to 1. The higher the value the less vulnerable is the country.

A geometric mean, rather than an arithmetic average, has been taken of the six indicator values of a particular country. This implies that a country with a very low value in one or more indicators gets a disproportionately lower overall value of the EVI.

The overall resulting score and the ranking of the 15 countries are presented table 1:

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                 Ranking of Countries in the
                  External Vulnerability Index
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Ranking     Country           Current Credit   Score in EVI
                               Rating              (0 to 1)
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1           Nigeria              B-                   0.715
2           Nicaragua            B-                   0.646
3           Cameroon             B-                   0.563
4           Ghana                B-                   0.560
5           Angola               B-                   0.540
6           Ecuador              B-                   0.481
7           Ukraine              B-                   0.478
8           Pakistan             B-                   0.465
9           Argentina            C                    0.431
10          Belarus              C                    0.407
11          El Salvador          B-                   0.406
12          Tajikistan           B-                   0.398
13          Ethiopia             C                    0.363
14          Sri Lanka            C                    0.343
15          Zambia               C                    0.268
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Pakistan is placed in the middle position with the eight ranking and a somewhat low score in the EVI of 0.465. All countries above Pakistan, have a ‘B–‘ rating. The two countries placed immediately after Pakistan, namely, Argentina and Belarus, have a low rating of C.

Pakistan’s performance in individual indicators is given table 2:

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Indicator                                  Score      Ranking
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Current Account Deficit as % of GDP        0.426          6th
External Debt as % of GNI                  0.850          4th
External Debt as % of Exports              0.314         13th
Debt Servicing as % of Exports             0.728          8th
Short-Term Debt as % of External Debt      0.767          5th
Reserves as % of External Debt             0.161         11th
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Pakistan’s performs relatively in external debt as % of GNI and in short-term debt as % of total external debt. The weak indicators are external debt as % of exports and reserves as % of external debt. An updating of the ranking could worsen Pakistan’s Position due to the big deterioration in the current account deficit position.

Among the above mentioned 15 countries, 10 are operating with an on-going IMF programme. Following COVID-19, many of these countries have accessed the Rapid Financing Facility of the IMF.

Pakistan’s position is increasingly fragile. The two countries placed in the ranking immediately after Pakistan, namely, Argentina and Belarus, are already in the ‘C’ category. If the IMF Program remains suspended or is terminated and the current account deficit remains high, then the credit rating of the country could be downgraded. This will make it even more difficult to float international Sukuk or Euro bonds at reasonable cost.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2022