Moody's Investors Services upgraded Pakistan's outlook from 'negative' to 'stable', reaffirming the country's rating of B3, the agency announced on Monday.

Moody's had downgraded Pakistan's ratings outlook to negative last year in June, citing heightened external vulnerability risk due to depleting foreign exchange reserves.

"The change in outlook to stable is driven by Moody's expectations that the balance of payments dynamics will continue to improve, supported by policy adjustments and currency flexibility. Such developments reduce external vulnerability risks, although foreign exchange reserve buffers remain low and will take time to rebuild," said Moody's on Monday.

"Moreover, while fiscal strength has weakened with higher debt levels largely as a result of currency depreciation, ongoing fiscal reforms, including through the country's International Monetary Fund (IMF) programme, will mitigate risks related to debt sustainability and government liquidity," it added.

"The rating affirmation reflects Pakistan's relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness, albeit from a low starting point.

"These credit strengths are balanced against structural constraints to economic and export competitiveness, the government's low revenue generation capacity that weakens debt affordability, fiscal strength that will remain weak over the foreseeable future, as well as political and still-material external vulnerability risks," Moody's said in a statement.

'Affirmation of government's success'

The upgrade was welcomed by the Ministry of Finance, which attributed the development to an "improvement in the balance of payments position, supported by policy adjustments and currency flexibility".

In a press release issued today, the finance ministry said: "The upgradation of outlook to stable is an affirmation of the government's success in handling the country's economy. The government remains fully committed to its reform agenda, which is producing the outcomes that will lay a firm foundation for accelerated, sustainable and inclusive growth in the future."

The New York-based agency reaffirmed Pakistan's B3 rating, which, according to finance ministry's press statement "reflects Pakistan's relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness".

The agency also highlighted "Pakistan's progress towards macroeconomic stabilisation with reduced vulnerabilities on the external account", the finance ministry said.

Adviser to the Prime Minister on Finance Abdul Hafeez Sheikh also lauded the news and said that the development is an "affirmation of government's success in stabilising the country’s economy and laying a firm foundation for robust long term growth".