Crediting the finance ministry's reform efforts and the International Monetary Fund (IMF) programme, the in-charge of South Asia affairs at the US State Department, Alice Wells, on Wednesday welcomed Moody's revision in Pakistan's credit outlook.

In a tweet shared by the State Department, Acting Assistant Secretary for South and Central Asia Wells added: "With bold economic reforms, Pakistan can boost growth, attract private capital, and expand exports."

New York-based credit rating agency Moody’s on Monday raised Pakistan’s economic outlook from negative to stable on the back of the country’s reforms supported by an IMF programme, but kept its credit rating unchanged at B3.

The ratings firm said improvements in the balance of payments was a primary driver of the rating action, but added that foreign exchange buffers would still take time to rebuild.

Read: Moody’s upgrades Pakistan’s economic outlook

The upgrade was welcomed by the Ministry of Finance, which attributed the development to an "improvement in the balance of payments position, supported by policy adjustments and currency flexibility".

Addressing a press conference on Tuesday, Adviser to the Prime Minister on Finance Dr Abdul Hafeez Sheikh said: "This report has shown the world that the reforms brought about by Pakistan in its economy are being appreciated by the world's leading financial institutions."

Moody’s had in June last year lowered Pakistan’s outlook to negative from stable owing to erosion in foreign exchange buffers due to heightened external pressures.

Its representatives had visited Islamabad on November 27 and noted that Pakistan’s economic fundamentals, including its economic strength and susceptibility to event risks, had not materially changed even though institutional strength had increased and financial strength decreased.

Appreciation for SBP's commitment to a floating exchange rate regime

Under Moody’s baseline assumptions, subdued import growth will likely remain the main driver of narrowing current account deficits. In particular, the ongoing completion of power projects will reduce capital goods imports, while oil imports will remain structurally lower given the gradual transition in power generation away from diesel to coal, natural gas and hydropower.

Tight monetary conditions and import tariff on non-essential goods will also weigh on broader import demand for some time, although the rating agency viewed the possibility of monetary conditions easing when inflation gradually declines towards the end of the current fiscal year.

Moody’s expected the policy enhancements, including strengthened central bank independence and the commitment to currency flexibility, to support the reduction in external vulnerability risks. It also appreciated the State Bank of Pakistan for strongly adhering to its commitment to a floating exchange rate regime since May 2019. “These enhancements to the policy framework will foster confidence in the Pakistani rupee, while the use of the exchange rate as a shock absorber increases policy buffers,” it said.

Notwithstanding improved balance of payments dynamics, Pakistan’s foreign exchange reserve adequacy remains low. Foreign exchange reserves have fluctuated around $7-8 billion over the past few months, sufficient to cover just 2-2.5 months of goods imports. Coverage of external debt due also remains low, with the country’s External Vulnerability Indicator — which measures the ratio of external debt due over the next fiscal year to foreign exchange reserves — remaining around 160-180pc.