By Staff Reporter
KARACHI: Moody’s Ratings raised Pakistan’s sovereign credit rating one notch to B3 from Caa1 on Monday, pointing to a steady rebuild in foreign-currency reserves and a lighter debt-servicing burden that has given the government more room to maneuver after years of fiscal strain.
The New York-based firm kept its outlook at stable and said the upgrade reflects expectations that improvements in governance will let Islamabad sustain recent gains in its external position while shoring up fiscal metrics. Pakistan remains firmly in speculative-grade territory — seven notches below investment grade — underscoring how far the country’s finances have to travel before they’re considered safe for mainstream global investors.
Foreign-exchange reserves rose to about $17 billion at the end of July, up from $14 billion a year earlier, giving Pakistan cover for nearly three months of imports, Moody’s said. The improvement helped push down the country’s external vulnerability indicator — a measure of short- and long-term debt coming due relative to reserves on hand — to roughly 145% in 2026 from 230% in 2025.
The upgrade extends a string of positive rating actions for a country that just three years ago stood on the brink of default. Standard & Poor’s Global Ratings lifted Pakistan to B from B-minus on July 22, citing improved political and institutional stability that has allowed the government to push through difficult reforms. Moody’s itself upgraded Pakistan to Caa1 from Caa2 last August.
Prime Minister Shehbaz Sharif congratulated the nation on the upgrade, though the one-notch move is unlikely to materially alter how investors price Pakistani risk given the rating remains deep in junk territory.
Reform Program Anchors Gains
Continued adherence to Pakistan’s International Monetary Fund-backed program has been central to the turnaround, Moody’s said, strengthening policy credibility and keeping the broader economy stabilized while unlocking financing from official creditors. The country has also edged back into international capital markets after years on the sidelines, selling a three-year, $750 million Eurobond in April and following that in May with a debut Panda bond — its first-ever yuan-denominated issuance — that raised 1.75 billion yuan, or roughly $250 million.
Those transactions, combined with steady inflows from bilateral and multilateral partners, have let Pakistan rebuild its reserve cushion while meeting all external obligations in the fiscal year that ended in June, according to the rating firm.
Moody’s projects reserves will climb further, to $19 billion to $20 billion by the close of fiscal 2027 and $20 billion to $21 billion in fiscal 2028 — forecasts that assume Islamabad keeps pace with its IMF commitments and continues to draw on both official and market financing. Those reserve levels would still fall short of a separate benchmark Pakistan agreed to with the Fund, which calls for reserves nearer $21 billion by this fiscal year-end.
The financing math ahead remains formidable. The IMF estimates Pakistan’s external financing needs at about $21 billion in fiscal 2027 and roughly $30 billion in fiscal 2028. Bilateral deposits already on the books and expected to be rolled over account for a meaningful share of that total — some $7 billion in fiscal 2027 and $12 billion in fiscal 2028 — leaving a smaller but still substantial gap to be filled through fresh borrowing and reserve drawdowns.
Debt Costs Ease as Inflation Cools
The rating action also reflects a sharp improvement in how much of the government’s revenue gets swallowed by interest payments. That figure fell to about 35% in fiscal 2026 from 49% a year earlier, Moody’s said, a shift driven largely by lower domestic interest rates following a steep decline in inflation that allowed the central bank to cut its policy rate.
Moody’s expects debt affordability to hold roughly steady near that 35% level over the next one to two years before gradually improving as fiscal consolidation chips away at the government’s overall debt load. The firm cautioned that the metric, while much improved, remains weak by international standards and continues to constrain the government’s ability to fund social programs and infrastructure.
Alongside the sovereign upgrade, Moody’s raised the backed foreign-currency senior unsecured rating for the Pakistan Global Sukuk Programme Co Ltd to B3 from Caa1, noting the underlying payment obligations sit directly with the government. It also lifted the rating on Pakistan’s senior unsecured medium-term note program to (P)B3 from (P)Caa1.
The firm separately raised Pakistan’s local-currency and foreign-currency country ceilings to B1 and B3, from B2 and Caa1. The two-notch gap between the local-currency ceiling and the sovereign rating reflects the government’s outsized footprint across the economy, institutional weaknesses and elevated political and external risk, Moody’s said. A second two-notch gap, between the foreign- and local-currency ceilings, stems from incomplete capital-account convertibility, weaker policy effectiveness and the lingering risk of transfer or convertibility restrictions being reimposed.
Governance Gaps Persist
Moody’s tempered its assessment with pointed reservations about the durability of Pakistan’s institutional progress. International governance surveys, while beginning to show tentative improvement, continue to point to weak rule of law, limited control of corruption and constrained government effectiveness, the firm said. Fiscal policy effectiveness remains low despite recent gains, it added, leaving Pakistan with a persistently narrow revenue base that limits the state’s capacity to meet the country’s broader needs.
Pakistan’s external accounts also remain structurally fragile, Moody’s said, pointing to a small export base, thin foreign direct investment inflows and heavy reliance on remittances and official or commercial financing to cover its external needs. Weak investment inflows continue to cap productivity growth, limit export diversification and constrain the economy’s overall growth potential, leaving the country exposed to any shift in external financing conditions, a slowdown in remittances or a pullback in investor confidence.
Finance Minister Muhammad Aurangzeb said last Wednesday that Pakistan intends to return to international debt markets with longer-dated paper across five-, seven- and 10-year tenors. The push comes as the finance ministry has left the position of director general of debt vacant since January, with an additional secretary for budget currently holding the post on an acting basis — an arrangement that has left the country’s debt office without a permanent, independent head.
Moody’s noted that elevated oil prices tied to the ongoing conflict in the Middle East pose a lingering risk to Pakistan’s import bill and inflation outlook, though it said the country’s larger reserve buffer leaves it better positioned to absorb such shocks than in past cycles. The stable outlook, the firm said, balances the possibility that Pakistan’s credit fundamentals improve faster than expected against the risk that any of the persistent vulnerabilities materialize and weaken the country’s access to foreign-currency financing or further squeeze its fiscal flexibility.
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