Moody’s Ratings has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3, with the outlook revised to positive from stable, as announced on Wednesday.
The global credit rating agency cited Pakistan’s improving macroeconomic conditions and slightly better government liquidity and external positions as key factors behind the upgrade. Moody’s noted that Pakistan’s default risk has now decreased to levels consistent with a Caa2 rating.
This marks a turnaround from February 2023, when Moody’s had downgraded Pakistan’s ratings.
The rating agency pointed to the increased certainty of Pakistan’s external financing sources, following the country’s staff-level agreement with the International Monetary Fund (IMF) on July 12, 2024, for a 37-month Extended Fund Facility (EFF) worth $7 billion. The IMF Board is expected to approve the EFF in the coming weeks.
Moody’s report highlighted that Pakistan’s foreign exchange reserves have approximately doubled since June 2023, though they still fall short of what is needed to meet its external financing requirements. The agency emphasized that Pakistan remains dependent on timely financial support from official partners to meet its external debt obligations.
However, Moody’s also warned that Pakistan’s very weak debt affordability continues to pose a high debt sustainability risk, with interest payments expected to consume about half of government revenue over the next two to three years. The rating agency noted that Pakistan’s weak governance and high political uncertainty remain significant challenges.
The positive outlook, however, reflects potential upside risks. Moody’s suggested that if Pakistan can continue implementing reforms, particularly those that raise government revenue, it could further reduce its liquidity and external vulnerability risks and improve its fiscal position, bolstered by the ongoing IMF program.
Moody’s also upgraded the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd. to Caa2 from Caa3, with a positive outlook. Additionally, the agency raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively.
Despite these upgrades, Moody’s cautioned that Pakistan’s external financing needs will remain substantial, with approximately $26 billion required for fiscal 2025, including $22 billion in external principal debt repayments. The financing needs for fiscal 2026-2027 are projected to be similar.
The agency also noted the risk that the coalition government, formed after the February 2024 elections, may face challenges in implementing revenue-raising reforms without triggering social unrest, which could delay or jeopardize financing from official partners.
