Moody's has upgraded Pakistan's sovereign rating from Caa1 to B3. But the signal is larger than one notch, because credit ratings are about risk. And Moody's is effectively saying that Pakistan today looks less risky than it did a year ago.
What changed? First, macroeconomic stability has improved. The rupee has remained relatively stable. The State Bank's foreign exchange reserves have gone up from $14 billion last year to $17 billion - an increase of 19.7 percent. Yes, the immediate fear of a balance-of-payments crisis has receded. Second, policy credibility has improved. The IMF programme remains on track. For creditors, consistency matters almost as much as policy itself. Third, Moody's expects the recent improvement in debt affordability to prove durable.
Cold fact: B3 is still not a strong credit rating. Pakistan still faces large external financing requirements. Energy shocks remain a threat. Reform remains incomplete.
Bottom line: direction matters. Pakistan is no longer being assessed as an economy constantly standing at the edge of a financing crisis. The distance from that edge has increased. The next challenge is harder: convert macroeconomic stabilization into investment, production, exports and household purchasing power. Caa1 to B3 is not the destination. It is evidence that Pakistan has begun moving in the right direction. The writer is an Islamabad-based columnist.