Moody’s Investors Service has upgraded Pakistan’s sovereign outlook to Stable from Negative while reaffirming the rating at B3. In a press release dated 2nd December, 2019 Moody’s acknowledges that the change in outlook to Stable is driven by improvements in the country’s balance of payments dynamics, supported by policy adjustments and currency flexibility. These developments have reduced Pakistan’s external vulnerability risks, although foreign exchange reserve buffers will take time to rebuild. Moody’s also notes that the ongoing fiscal reforms will help in mitigating risks related to debt sustainability and Government liquidity.
The rating affirmation reflects Pakistan's relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness. Moody's expects Pakistan's current account deficit to continue narrowing in the current and next fiscal year with subdued import growth likely remaining the main driver of narrowing current account deficits. The present tight monetary conditions and import tariffs on nonessential goods will also weigh on broader import demand for some time, although Moody's sees monetary conditions easing when inflation gradually declines towards the end of the current fiscal year.
Moody's expects exports to gradually pick up on the back of the real exchange rate depreciation over the past 18 months, also contributing to narrower current account deficits. The press release highlights the Government’s efforts for raising the country's trade competitiveness with the recent roll out of a National Tariff Policy aimed at incentivising production for exports or import substitution. The policy, coupled with improvements in the terms of trade, will allow exports to grow more robustly. The substantial increase in power generation capacity over the past few years and improvements in domestic security have largely addressed two significant supply-side constraints and further support export-related investment and production.
Moody's further expects policy enhancements, including strengthened central bank independence and the commitment to currency flexibility, to support the reduction in external vulnerability risks as these measures will foster confidence in the Pakistani rupee.
On the fiscal side, Moody's expects ongoing fiscal reforms to contribute to a gradual narrowing of the fiscal deficit. The reforms would also mitigate debt sustainability and Government liquidity risks. Moody’s acknowledges that in order to widen the tax net, the Government has eliminated a number of tax exemptions and concessions besides introducing automatic income tax filing to reduce tax evasion and applying the sales tax to a wider group of businesses. On the expenditure side, Moody’s notes the significance of the new Public Financial Management Act introduced by the Government to instil budget discipline. Given gradually narrowing fiscal deficits, Moody's expects the Government’s debt to slowly decline over the next few years. The debt structure is also expected to continue to become more favourable.
Moody’s press release also highlights that as the Government addresses key challenges faced by the economy, it is cognizant of protecting the vulnerable segments of the society through its Ehsaas programme that is aimed at reducing poverty and inequality, strengthening social safety nets, and promoting human capital development.
Moody’s press release affirms the significant progress made on the economic front by the present Government. The market also reflects the positive sentiment as stability returns with the stock index rising with each passing day. The Government remains committed to its reform agenda for achieving accelerated, sustainable and inclusive growth in the years ahead.
