Moody's Investors Service has upgraded Pakistan's sovereign outlook to Stable from Negative.
In a press release today, 2019 Moody's acknowledged 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.
It said these developments have reduced Pakistan's external vulnerability risks, although foreign exchange reserve buffers will take time to rebuild.
Moody's also noted 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 highlighted 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 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 acknowledged 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 instill budget discipline.
Moody's press release also highlighted that 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 affirmed the significant progress made on the economic front by the present government.
(Haider / Imran)