Standard & Poor’s Ratings Services has revised the outlook on its long-term sovereign credit ratings on the Islamic Republic of Pakistan to positive from stable. The ‘B/B’ foreign currency and ‘BB-/B’ local currency sovereign ratings on Pakistan were affirmed.
The outlook revision reflects improved fiscal and macroeconomic performance, growing external liquidity, and continued structural reforms under Prime Minister Jamali’s government. “Since coming to power about a year ago, the Jamali-led coalition government has generally remained steadfast in practicing prudent economic management,” says Standard & Poor’s Sovereign credit analyst Chih Wai Liew. “Investor confidence and economic stability have been boosted by the reduction in Pakistan’s general government deficit (excluding grants) to 4.4% of GDP in fiscal 2003, a 27-year low,” Liew adds.
Progress on the extensive structural reforms agenda is largely on track, although still incremental. This progress comes despite a lack of public support, a difficult external environment, and domestic political uncertainties created by the ongoing impasse between the government and opposition over the Legal Framework Order (LFO).
“The positive outlook also takes into account Pakistan’s strengthening macroeconomic performance,” adds Liew. Pakistan’s economy outperformed expectations by registering real GDP growth of 5.8% in fiscal 2003. This is the fastest since fiscal 1992. The higher growth rate reflects cyclical factors, particularly favourable rainfall, and growing domestic confidence. Inflation has declined to 3.1%, the lowest level in more than a decade, and external liquidity improved, with foreign exchange reserves exceeding US$10bn at the end of October 2003.
Looking ahead, ratings could improve if government can build stronger public consensus for the prolonged structural reform required to create a virtuous cycle of sustained economic growth, job creation, poverty reduction, and falling debt. Credit standing could also improve if government manages to tighten public finances by widening the tax base, improving compliance and making public expenditure more efficient in raising living standards. Conversely, any backtracking on reforms or fiscal slippage that would tilt the government’s debt trajectory upward again and could result in renewed downward pressure on the ratings.