ISLAMABAD – Moody’s Investors Service says that Pakistan’s (B3 stable)credit profile is supported by the country’s robust growth performance andpotential, a large — but low-income — economy, and an improved track recordof reforms that started under its 2013-16 International Monetary Fund (IMF)program.

These strengths have been accompanied by greater transparency and lowerlevels of inflation and inflation volatility.

The credit rating agency continues to expect solid economic activity,driven by investments related to the China-Pakistan Economic Corridor(CPEC).

The report stated that the credit challenges include the country’s highgeneral government debt burden and low debt affordability, weak physicaland social infrastructure weighing on economic competitiveness, anincreasingly vulnerable external payments position, and high politicalrisk. In particular, the government’s very narrow revenue base restrictsfiscal flexibility and weighs on debt affordability.——————————

The moderate but rising level of external government debt also exposes thecountry’s finances to sharp currency depreciation.

In addition, the high level of imports — largely because of CPEC —continues to exert pressure on the external account. The decline inPakistan’s foreign exchange reserves has reduced the import cover to lessthan 2.5 months.

Moody’s conclusions are contained in its annual credit analysis on Pakistanwhich examines the sovereign in four categories:

– Economic strength – moderate (+) – Institutional strength – very low (+) – Fiscal strength – very low (-) – Susceptibility to event risk – high (-)

The report constitutes an annual update to investors and is not a ratingaction.

Moody’s report says that the stable outlook on Pakistan’s B3 sovereignrating reflects balanced risks to the country’s credit profile.

Moody’s points out that there is potential for a further strengthening inPakistan’s growth beyond Moody’s current expectations because successfulimplementation of CPEC can transform the Pakistani economy by removinginfrastructure bottlenecks and stimulating both foreign and domesticinvestment.

However, fiscal costs related to the project could raise Pakistan’s debtburden more rapidly than Moody’s expects, and persistently high levels ofimports could develop into greater external vulnerability.