Despite the government’s cover-up of a controversial GDP growth rate for 2013-14, international credit rating agencies seem to be largely sold on Pakistan’s economy. Moody’s Investors Service revised the outlook on Pakistan’s foreign currency government bond rating to ‘stable’ from ‘negative’.
Moody’s decision to revise the outlook on Pakistan’s foreign currency rating is based on the “stabilisation in the country’s external liquidity position” supported by the government’s strong commitment to reforms under an on-going programme with the International Monetary Fund (IMF). The continued implementation of structural reforms under the programme will ensure additional tranche disbursements, buffering Pakistan’s foreign reserves, it said.
Foreign exchange reserves held by the State Bank of Pakistan (SBP) stood at $9,602 million on July 4 after increasing more than 50% in 2013-14.
A key factor behind Moody’s one-notch downgrade and outlook revision for Pakistan back in July 2012 was a deterioration in the external liquidity position due to a widening current-account deficit, large outflows from the financial account and a decline in international reserves to very low levels.
“This situation has reversed over the past year: the current-account deficit is modest, estimated at 1% of GDP for June 2014, while financial inflows have increased due to a $2 billion Eurobond sale earlier this year, privatisation proceeds, and multilateral and bilateral funding,” Moody’s said, adding that repayments to the IMF from the previously suspended programme are tapering off even as disbursements from the on-going programme continue.
Although Pakistan’s past record is weak with regard to previous programmes with the IMF, Moody’s says the country is making steady progress in meeting reform benchmarks under the current 36-month $6.8 billion Extended Fund Facility with the IMF. Noting that Pakistan has cleared three programme reviews and received $2.2 billion of financial assistance, it said the government has met 10 of 17 structural benchmarks, and “appears to be on track towards achieving the remainder”.
These goals include tax and energy sector reforms, as well as efforts to privatise state-owned enterprises. “Reform implementation may be challenging. Nonetheless, we think the authorities will persevere to achieve the overall intent of the package,” it said.
Warning of dangers that lie ahead, Moody’s said a stalling of the on-going IMF programme, deterioration in the external payments position, or a worsening political environment will be viewed as credit negative. In contrast, upward triggers to the rating stem from the successful completion of the IMF programme, further improvements in the external liquidity position, continued fiscal consolidation, and progress on structural reforms that will remove infrastructure impediments and supply-side bottlenecks. “Domestic political stability and steady relations with international donors would further support the rating,” it said.
Published in The Express Tribune, July 15th, 2014.
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