By Staff Reporter
KARACHI: Moody’s Ratings upgraded Pakistan’s local- and foreign-currency issuer and senior unsecured debt ratings to Caa1 from Caa2, pointing to the country’s strengthening external buffers and headway on reforms tied to its $7 billion International Monetary Fund (IMF) program.
“We have also upgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)Caa2,” the agency said in a statement Wednesday. “Concurrently, we changed the outlook for the Government of Pakistan to stable from positive.”
The shift underscores how Pakistan has bolstered its foreign-exchange reserves over the past year, climbing to $14.3 billion by July 25, enough for about 10 weeks of imports, from $9.4 billion at Moody’s last review in August 2024 and triple the tally from end-June 2023. That buildup stems from timely disbursements under the IMF’s Extended Fund Facility, including a $1 billion tranche unlocked in May after the program’s first review wrapped on schedule. June brought another boost with a $1 billion commercial loan backed by a $500 million guarantee from the Asian Development Bank.
Pakistan met all its external debt payments in fiscal 2025, which closed in June, and Moody’s anticipates it will continue doing so over the next few years, provided reforms stay on track and IMF reviews proceed without hitches. Fresh funding avenues have opened up, such as a 28-month IMF Resilience and Sustainability Facility arrangement valued at roughly $1.4 billion and a decade-long World Bank partnership framework for fiscal 2026-2035 carrying an indicative $20 billion envelope.
Yet vulnerabilities linger, with reserves still short of covering looming obligations and underscoring the need for unwavering IMF compliance to keep inflows steady. Moody’s pegs Pakistan’s external financing requirements at $24 billion to $25 billion for fiscal 2026, with comparable sums due the following year. “We expect further gradual improvements as progress in reform implementation under the IMF program supports financing from bilateral and multilateral partners,” the agency noted. “In turn, this contributes to continued increases in the sovereign’s foreign exchange reserves, albeit from still fragile levels.”
Fiscal metrics are mending too, albeit from rock-bottom starting points, as tax revenues expand and deficits shrink. Government intake hit about 16% of gross domestic product in fiscal 2025, up from 12.6% the prior year, fueled by a 2-percentage-point GDP jump in tax collections and a hefty one-time dividend from the State Bank of Pakistan. Moody’s sees revenues dipping slightly to 15%-15.5% of GDP this fiscal year amid fading central bank payouts, but tax gains should offset much of that, rising another 0.5 percentage points thanks to new levies on agriculture (effective January 1, with collections starting September), small vehicles, solar panels and e-commerce.
Spending restraint plays a role, with power subsidies trimmed through energy overhauls and debt costs easing as domestic rates fall in step with policy easing. Defense outlays are budgeted higher, but overall, Moody’s projects the fiscal shortfall narrowing to 4.5%-5% of GDP in fiscal 2026 from 5.4% last year. Interest payments, while down from gobbling 60% of revenues in fiscal 2024, are still forecast to claim 40%-45% through 2027, a heavy drag by global standards and a core rating limiter. “Its debt affordability has improved, but remains one of the weakest among rated sovereigns,” Moody’s said. “The Caa1 rating also incorporates the country’s weak governance and high political uncertainty.”
The upgrade extends to backed foreign-currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, which Moody’s views as direct government commitments. “The associated payment obligations are, in our view, direct obligations of the Government of Pakistan.” Its outlook likewise flips to stable from positive, aligning with the sovereign’s.
Country ceilings got a lift as well: local-currency to B2 from B3, foreign-currency to Caa1 from Caa2. The two-notch spread between the local ceiling and sovereign rating reflects Islamabad’s outsized economic role, institutional frailties and elevated political plus external risks. Between foreign and local ceilings, the gap accounts for partial capital convertibility, policy shortcomings and potential curbs on transfers or conversions.
With risks evenly poised, the stable outlook balances potential upsides, like faster-than-expected relief on debt burdens and external metrics, against pitfalls such as reform stumbles that could choke off partner support and erode gains. “On the upside, improvements in the debt service burden and external profile could be more rapid than we currently expect,” Moody’s said, adding that a solid reform history might draw extra funding, fortify reserves and enhance affordability beyond base-case assumptions via broader tax netting.
Downside pressures include reform delays or shortfalls prompting financing pullbacks and fresh external strains. Past IMF deals often faltered amid governance lapses and political headwinds; the post-February 2024 election government grapples with pushing revenue hikes without sparking unrest. “A number of previous IMF programs were not completed, in part reflecting weak governance and institutional strength, compounded by a challenging domestic political environment,” Moody’s observed. “The current government formed after the February 2024 elections faces a significant challenge to continually implement revenue-raising measures without triggering social tensions.”
Copyright © 2021 Independent Pakistan | All rights reserved
