Global credit rating agency Moody’s has revised Pakistan’s banking sector outlook from stable to positive, citing resilient financial performance and improving macroeconomic conditions from the weak levels of the previous year.
In its latest assessment, Moody’s noted that Pakistan’s banks have substantial exposure to the government, holding about 50% of total banking assets in sovereign securities. The sector’s outlook aligns with the government’s positive rating trajectory, reflecting better liquidity and external financing conditions.
Despite this improvement, Moody’s cautioned that Pakistan’s long-term debt sustainability remains a significant risk, given the country’s weak fiscal position and external vulnerabilities.
The agency projects Pakistan’s GDP to grow by 3% in 2025, compared to 2.5% in 2024 and a contraction of -0.2% in 2023. It also forecasts a sharp decline in inflation to 8% in 2025, down from an average of 23% in 2024, which is expected to support economic stability and boost investor confidence.
Moody’s observed that problem loan formation will slow as borrowing costs and inflation decline, though net interest margins may narrow due to lower interest rates. Banks are expected to maintain adequate capital buffers, supported by subdued loan growth and solid cash generation, even as dividend payouts remain high.
Pakistan’s economic conditions are stabilizing, aided by the $7 billion, 37-month IMF Extended Fund Facility approved in September 2024, providing a reliable external financing source over the next few years.
Moody’s expects GDP growth to rise further to 4% in 2026, driven by a 10 percentage point reduction in interest rates since the start of the monetary policy easing cycle in June 2024. It also anticipates that lower inflation and interest rate cuts will encourage private-sector spending and investment.
However, the agency flagged high exposure to government securities as a key asset risk, with these securities accounting for 55% of banks’ total assets as of September 2024. While problem loans increased to 8.4% of total loans, overall lending represents only 23% of total banking assets, limiting the impact of loan deterioration.
With the removal of the Advance-to-Deposit Ratio (ADR) tax in 2025, Moody’s expects less pressure on banks to expand financing, especially as demand remains moderate despite lower borrowing costs.
The rating agency previously highlighted that Pakistan’s interest costs will account for nearly 40% of total spending in 2025, compared to around 25% in 2021, underscoring ongoing fiscal challenges despite improving economic indicators.
