Moody’s has upgraded Pakistan’s economic outlook status from negative to stable.
Pakistan’s economy rating is still at B3. Moody’s is an American business and financial service company that works with credit ratings. It upgraded Pakistan’s status after the improvement in the current account deficit.
It expects that the balance of payments dynamics will continue to improve, supported by policy adjustments and currency flexibility. “Such developments reduce external vulnerability risks, although foreign exchange reserve buffers remain low and will take time to rebuild,” it said in a December 2 report. It also noted that while the country’s fiscal strength has weakened because of the rupee devaluation and high levels of debts, the ongoing fiscal reforms will reduce risks related to debt sustainability and government liquidity.
It said this status change reflects Pakistan’s relatively large economy and robust long-term growth potential, coupled with ongoing institutional changes that raise policy credibility and effectiveness, albeit from a low starting point.
Moody’s expects Pakistan’s current account deficit to continue narrowing in the current and next fiscal year, averaging around 2.2% of the GDP, from more than 6% in fiscal 2018 and around 5% in fiscal 2019.
It expects that the completion of power projects will reduce capital goods imports, while oil imports will remain structurally lower given the slow transition in power generation away from diesel to coal, natural gas and hydropower. Tight monetary conditions and import tariffs on nonessential goods will also impact broader import demand for some time, although Moody’s sees the possibility of monetary conditions easing when inflation gradually declines towards the end of the current fiscal year.
Moody’s also expects exports to gradually pick up due to the exchange rate depreciation over the past 18 months, also contributing to narrower current account deficits.It said that if the government’s policy to increase trade competitiveness and encourage production works, exports will grow more.
It also noted that the ongoing fiscal reforms will gradually strengthen the government’s own coffers. It also considered environmental, social and governance concerns when it upgraded the rating.