Moody's lifts Pakistan's outlook to stable from negative

Agency affirms the sovereign’s B3 rating citing economic stability and long-term growth potential

A labourer arranges tomatoes in crates at a market in Lahore on November 24, 2019.    / AFP / Arif ALI
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Moody's has affirmed Pakistan's B3 rating and revised its outlook to stable from negative. The credit rating agency changed its outlook as it expects Pakistan’s balance of payments to improve on the back of fiscal policy reforms and currency flexibility.

The government has rolled out several initiatives to rein in budget deficits and introduced a National Tariff Policy aimed at raising the country's trade competitiveness by incentivising production for exports or import substitution. To instill budgetary discipline and central bank independence, the government also passed a Public Financial Management Act in a bid to improve monetary and fiscal policy credibility and effectiveness. It also plans to introduce a new law banning the central bank from financing government debt and setting its primary objective as achieving price stability.

“While fiscal strength has weakened with higher debt levels largely as a result of currency depreciation, ongoing fiscal reforms, including through the country's International Monetary Fund programme, will mitigate risks related to debt sustainability and government liquidity,” said Moody’s in a note today.

The weakening rupee meant Pakistan's foreign currency obligations mounted, with Pakistan's debt-to-gross domestic product ratio jumping to 82.4 per cent in its 2019 fiscal year, which ended in June, up from 69.9 per cent last year.

Despite the government's tight revenue base and low foreign exchange reserves, Pakistan’s large economy and robust long-term growth potential continue to bolster its creditworthiness, Moody's said.

The agency expects Pakistan's GDP to slow to 2.9 per cent in 2020 from 3.3 per cent last year, before rising to 3.5 per cent in 2021. The government’s fiscal deficit is projected to remain at around 8.6 per cent of GDP in 2020, compared to 8.9 per cent this year, before narrowing to an average of around 7 per cent over the course of 2021-23.

Moody’s may raise Pakistan’s ratings if the government's revenue base, debt affordability and foreign exchange reserve improves. On the other hand, the ratings may be downgraded if there is a renewed deterioration in Pakistan's external position or an increase in the government’s debt burden.