THE decision by Moody’s to upgrade Pakistan’s long-term sovereign credit rating from Caa3 to Caa2 could not have come at a better time. The agency has also revised its outlook for the country’s beleaguered economy from stable to positive. The rating upgrade, which comes after a similar announcement by Fitch, is inspired by Pakistan’s improving macroeconomic conditions, especially liquidity and its external position, which have improved from very weak levels amidst a staff-level agreement with the IMF for a fresh $7bn bailout.

Despite the upgrade, the new rating still remains within the agency’s “speculative grade’ band and continues to reflect the nation’s “very weak debt affordability that drives high debt sustainability risk”. Yet the agency has noted that Pakistan’s default risk has reduced even though the nation’s interest payments would continue absorbing about half of government revenues over the (next) two to three years.

The improvement in the country’s investment risk profile, as reflected by the rating upgrades by two major agencies within a month, must help reduce Pakistan’s country risk premium and elevate investor confidence. The stock market perked up on Thursday as Moody’s elevated confidence in this economy substantially wiped clean uncertainty around the IMF loan approval delays.

More importantly, this should go a long way in facilitating the government’s return to the global bond markets and commercial banks for fresh funds it aims to raise by the next fiscal year for budgetary support and covering the gross external financing hole, one of the reasons for the delayed IMF approval. With a better rating, the government would be able to negotiate less harsh terms and lower interest rates with the foreign commercial banks it is in talks with for raising $4bn.

That said, Moody’s, like Fitch, has warned that uncertainty persists regarding the government’s ability to maintain and implement reforms sustainably. It suspects that the coalition government led by the PML-N formed after the February elections may not have a sufficiently strong electoral mandate to continually implement revenue-raising measures without stoking social tensions. “… (The potential) slippages in reform implementation could lead to delays in or withdrawal of financing support from (multilateral and bilateral) official partners,” it added.

“(This could elevate investment risks) since Pakistan continued to rely on timely and sufficient disbursement of financing from official partners to fully meet its external debt obligations,” it observed.

In other words, the government can ill-afford any digression from the IMF reforms, including revenue-raising measures, if it wants to ensure timely reviews of the Fund programme, continually unlock financing from official partners to meet its external debt obligations, and support further build-up of its forex reserves. Pakistan’s economy has come a long way from where it was a year ago. But it still isn’t in a position to hold its own without multilateral and bilateral help.

Published in Dawn, August 30th, 2024