KARACHI: Credit rating agency Moody’s kept Pakistan’s B3 rating with a stable outlook in a recent analysis, saying strong growth performance, fiscal deficit reduction and improved inflation dynamics underpin the rating.

At the same time, credit challenges include a relatively high general government debt burden, weak physical and social infrastructure, a fragile external payments position, and high political risk, the rating agency said.

In particular, the government’s very narrow revenue base weighs on debt affordability. Moreover, exports and remittance inflows have slowed and capital goods imports have risen, resulting in renewed pressure on the external account.

Moody’s annual credit analysis method of Pakistan includes economic strength, which is assessed as “moderate”, institutional strength “very low (+)”, fiscal strength “very low (-)” and susceptibility to event risk “high”.

The rating agency notes that prospects for growth have improved following Pakistan’s successful completion of its three-year Extended Fund Facility (EFF) program with the International Monetary Fund (IMF) in September 2016 and the launch of the China-Pakistan Economic Corridor (CPEC) project in 2015.

The CPEC project has the potential to transform the Pakistani economy by relieving infrastructure bottlenecks, and stimulating both foreign and domestic investment, it said. However, headwinds to further fiscal consolidation and renewed pressure on the external account present downside risks to the rating.

“Since 2013, implementation of economic reforms and increased foreign investment flows have contributed to macroeconomic stability and higher GDP growth. However, government debt remains elevated and pressure on the external account continues,” said William Foster, a Vice President and Senior Credit Officer at Moody’s.

Upward triggers to the rating would stem from sustained progress in structural reforms that would significantly reduce infrastructure impediments and supply-side bottlenecks, the rating agency said. This would improve Pakistan’s investment environment and eventually aid a shift to a sustained higher growth trajectory. A fundamental strengthening in the external liquidity position and meaningful reduction in the government deficit and debt burden would also be credit positive.

Moody’s would view a stalling of the government’s post-IMF program economic reform agenda, material widening of the fiscal deficit, a deterioration in the external payments position as negative.