In a significant development, Moody’s Ratings has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt rating to ‘Caa2’ from ‘Caa3’, with a positive outlook. This upgrade comes at a crucial time, just weeks ahead of Pakistan’s expected $7 billion International Monetary Fund (IMF) loan program.
The move signals a reduced risk of default and renewed foreign investor confidence in Pakistan’s economy.
The upgrade reflects Pakistan’s improving macroeconomic conditions, better government liquidity, and external positions. Moody’s expects the IMF Board to approve the loan program within weeks, providing greater certainty on Pakistan’s sources of external financing. This development is expected to open up new avenues for Pakistan to raise foreign debt financing at relatively lower costs.
The positive outlook balances risks, with a tilt toward potential improvement, and accounts for the possibility of further reduction in liquidity and external vulnerability risks. However, Moody’s cautioned that Pakistan’s ‘Caa2’ rating still reflects the country’s very weak debt affordability, which poses significant debt sustainability risks.
The upgrade is a testament to the government’s efforts to implement reforms and improve the country’s economic outlook. The IMF program is likely to help Pakistan unlock additional financing from other multilateral and bilateral partners, supporting further rebuilding of its foreign exchange reserves.
The government’s commitment to broadening its revenue base through measures such as increasing taxes on the agriculture, retail, and export sectors is a step in the right direction. If implemented and sustained, these measures could improve Pakistan’s debt affordability beyond current forecasts.
However, challenges remain, and the government must maintain reform efforts to unlock financing from official partners. Slippages in reform implementation could delay or derail financing support from official partners.
In conclusion, Moody’s upgrade of Pakistan’s rating to ‘Caa2’ with a positive outlook is a positive step towards economic recovery. The government must build on this momentum by implementing reforms and maintaining fiscal discipline to achieve sustainable economic growth.
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