It is really pleasing to learn that Moody's Investors Service (Moody's) has affirmed the government of Pakistan's local and foreign currency long-term issuer and senior unsecured debt ratings at B3 and raised Pakistan's economic outlook from negative to stable on the basis of the reforms supported by an IMF programme. In its latest report, Moody's has said "the change in outlook to stable is driven by expectations that the balance of payments [BoP] dynamics will continue to improve, supported by policy adjustments and currency flexibility." These developments will reduce external vulnerability risks although foreign exchange reserve buffers remain low and will take time to rebuild. The rating affirmation reflected Pakistan's robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness. These credit strengths were balanced against structural constraints to economic and export competitiveness, the government's low revenue generation capacity that weakens debt affordability and fiscal strength that will remain weak over the foreseeable future. On the fiscal side, Pakistan's metrics have weakened recently, with wider fiscal deficits and an increase in government debt burden largely as a result of currency depreciation. It was expected that the government's fiscal deficit would remain relatively wide at around 8.6 percent of GDP in FY20 compared to 8.9 percent a year earlier, before narrowing to an average of around 7 percent over fiscal 21-23. Support from the IMF and the World Bank will raise effectiveness of the revenue measures. High interest payments owing to policy rate hikes would continue to weigh on government finances and significantly constrain fiscal flexibility. Pakistan's GDP growth rate was expected to slow down to 2.9 percent during FY20 from 3.3 percent last year, given tight fiscal conditions that continue to weigh on domestic demand, before rising to 3.5 percent in FY21.

Moody's had lowered Pakistan's outlook to negative from stable in June last year due mainly to erosion in foreign exchange buffers owing to heightened external pressures and noted that the country's economic fundamentals, including its economic strength and susceptibility to event risks had not materially changed. The news that the Moody's has changed its outlook to stable is indeed a very welcome development for the country as an improved economic outlook would surely enable the country to attract more FDI and external loans. Adviser on finance, Dr Hafeez Shaikh, promptly took credit for better outlook forecast by Moody's, saying that it showed the government's success in stabilising the country's economy and laying a firm foundation for a robust long-term growth. In our view, the credit for this success also goes to the political leadership of the PTI, particularly Prime Minister Imran Khan and his party men who had to face a great deal of criticism for undertaking a series of reforms which are quite unpopular. Anyhow, the message is that Pakistan has succeeded in overcoming the crisis in the external sector though the forex buffers are still not sufficient, fiscal situation of the country continues to be precarious and Pakistan needs to continue the reform process in various areas of the economy before conditions are ripe for a sustained growth with stability. Fortunately, the government is aware of these weaknesses and prepared to see it through by staying the course. In order to improve the fiscal position which is now the weakest area, the government has eliminated a number of tax exemptions and concessions and lowered the minimum threshold for personal income tax. Authorities are also introducing automated income tax filing to reduce tax evasion and applying sales tax to a wider group of businesses. On the expenditure side, the government has introduced a new Public Financial Management (PFM) Act to instill discipline. The Act bars the use of supplementary budgets except in exceptional circumstances, introduces the use of single treasury account to better monitor cash flows and prevents fiscal authorities from changing future tax policies without parliamentary approval. We know that the challenges on the fiscal front are huge and the resistance to these measures is immense but the government has to be resolute to overcome a very difficult problem that has been the mother of most of the economic ills.

Although, the present government seems to be ready to face resistance to its reform process, there are certain signs of complacency and reform fatigue. In fact, the Prime Minister has asked his economic team recently to provide relief to the common people and concessions to business community which may put extra burden on the budget and reverse or slow down the reform process. The PTI government needs to realise that the tax receipts during the current year are much lower than the target and the fiscal deficit as a percentage of GDP continues to be higher than the desirable level. Policies on both the fiscal and external sectors need to be watched and monitored closely to ensure that these are in line with the growth requirements of the economy and the conditions agreed with the Fund. In other words, the government is required to strike a delicate balance.