KARACHI: Moody’s Investors Service on Wednesday upgraded Pakistan’s foreign currency government bonds rating from stable to positive. The rating is affirmed at Caa1.

Concurrently, Moody’s has affirmed the government’s issuer rating and senior unsecured rating at Caa1. The same rating is also affirmed for US dollar Trust Certificates issued by the Second Pakistan International Sukuk Company Limited.

Its decision to revise the outlook came in view of Pakistan’s strengthening external liquidity position, continued efforts towards fiscal consolidation and steady progress in achieving structural reforms under the International Monetary Fund (IMF) programme.

Foreign reserves with the State Bank (SBP) climbed to $11.2 billion as of March 13, 2015, from $3.2bn at the end of January 2014. The cushion provided by foreign reserves coupled with dwindling external debt repayments to the IMF has reduced external vulnerabilities, Moody’s said.

This has in large part resulted from a lower current account deficit, which was easily financed by the issuance of eurobond and sukuk in April and December 2014, disbursements under the IMF programme and privatisation proceeds.

The narrowing of the current account deficit to 1.2 per cent of GDP in FY14 from 2.1pc in FY12 was due to the steady uptick in workers’ remittances. “We estimate that the current account will narrow further in FY15 to 0.8pc of GDP, on account of the fall in oil prices,” Moody’s said.

Although wide fiscal deficits and high debt levels remain a credit constraint, Pakistan has made progress towards fiscal consolidation. In FY14, the deficit was brought down to 5.5pc of GDP (excluding grants) from 8.2pc the previous year. The government is targeting a further shrinkage in the deficit to 4.9pc in FY15.

The government has relied on the banking system for deficit financing, but such borrowing is gradually declining as privatisation proceeds and the eurobond/sukuk issuances have helped it to diversify funding.

Moreover, the maturity of domestic public debt is lengthening as the government substitutes short-term treasury bills with Pakistan Investment Bonds (PIBs) that carry a longer tenure.

“This will reduce roll-over risks and volatility in debt issuance prices.”

As of December 2014, Pakistan had cleared five IMF reviews, receiving $3.2bn in assistance under the $4.39bn Special Drawing Rights (SDR) programme that it signed in September 2013.

In February 2015, the IMF issued a statement upon the conclusion of its staff mission, indicating that the sixth review had been conducted successfully.

Although Pakistan’s international liquidity buffer has been replenished and balance of payments pressures have subsided, an incipient recovery in investor confidence has not yet significantly boosted direct investment inflows.

In addition, most of the build-up in reserves has come from external borrowings, including drawdowns from Pakistan’s IMF programme.

Published in Dawn, March 26th, 2015

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