Moody’s Upgrades Pakistan’s Rating; Changes Outlook to Stable from Positive

Moody’s Investors Service has upgraded Pakistan’s long-term foreign debt rating from Caa2 to Caa1, reflecting the country’s improving external position. The outlook has been revised to stable, signaling confidence in Pakistan’s economic trajectory. The upgrade reflects growing confidence in Pakistan’s ability to manage external debt repayments, shore up foreign exchange reserves, and broaden its tax base, despite continued political uncertainty and weak governance. The upgrade also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, with the outlook similarly revised to stable. Additionally, Pakistan’s local and foreign currency country ceilings have been raised to B2 and Caa1, respectively, from B3 and Caa2. Moody’s highlighted Pakistan’s strengthening external position, supported by steady progress in reform implementation under the IMF program. Foreign exchange reserves have risen significantly, reaching $14.3 billion as of July 25, 2025, equivalent to ten weeks of imports. This marks a substantial improvement from $9.4 billion in August 2024 and triple the level recorded at the end of June 2023. The successful completion of the first review of the IMF program in May 2025 unlocked a $1 billion disbursement, while additional financing was secured through a $1 billion commercial loan backed by a $500 million guarantee from the Asian Development Bank (ADB). Pakistan has also unlocked new financing sources, including a $1.4 billion arrangement under the IMF Resilience and Sustainability Facility (RSF) and a ten-year partnership framework with the World Bank, with an indicative financing envelope of $20 billion. Despite these improvements, Moody’s cautioned that Pakistan’s external position remains fragile, with foreign exchange reserves still below the levels required to meet external debt obligations. The country’s external financing needs are estimated at $24-25 billion annually for the next two fiscal years, underscoring the importance of continued reform implementation and timely financing. Pakistan’s fiscal position has also shown improvement, with government revenues rising to 16% of GDP in FY2025 from 12.6% in FY2024, driven by enhanced tax collection and new revenue measures. The fiscal deficit has narrowed to 5.4% of GDP in FY2025, with further reductions expected in FY2026. However, debt affordability remains a key challenge, with interest payments projected to absorb 40-45% of government revenue in FY2026-27, down from 60% in FY2024 but still high by international standards. Moody’s noted that while fiscal reforms are progressing, the government’s capacity to address social and environmental risks remains constrained by weak governance and limited fiscal space. The stable outlook reflects balanced risks to Pakistan’s credit profile. On the upside, faster-than-expected improvements in debt affordability and external reserves could lead to further upgrades. On the downside, delays in reform implementation or financing support could weaken Pakistan’s external position and trigger renewed vulnerabilities, Moody’s added. Moody’s also highlighted Pakistan’s exposure to environmental and social risks, including climate change, water scarcity, and limited access to basic services, which pose long-term challenges to economic resilience. Moody’s indicated that further upgrades would depend on significant improvements in Pakistan’s debt affordability and external position, supported by sustained reform implementation and fiscal consolidation. Conversely, a downgrade could result from renewed liquidity pressures, financing strains, or heightened social and political risks that disrupt policymaking.