ISLAMABAD:
Moody’s on Wednesday upgraded Pakistan’s credit rating to the speculative grade of Caa1, lifting it from the brink of default, and noted that while debt affordability has improved, it remains the weakest among peers.
The rating agency — one of the world’s top three — raised Pakistan’s standing for the first time in a year and assigned a “stable” outlook, citing overall improvements in the country’s external and fiscal positions. Pakistan had been at serious risk of default less than two years ago.
The global credit rating agency has acknowledged the efforts that the government put in the past over one-and-a-half years to stabilise the economy.
“Moody’s Ratings has upgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2”, reads the announcement.
Pakistan still remains at least a notch below the minimum investment grade that the government needs for issuing international sovereign bonds at competitive rates. The government remains unable to float these bonds due to riskier credit ratings that often lead to double-digit interest rates.
Moody’s has also warned about the “fragile” position of the foreign exchange reserves despite improvements due to higher external debt repayments, estimated at $50 billion for two fiscal years.
“Pakistan’s external position remains fragile. Its foreign exchange reserves remain well below what is required to meet its external debt obligations, underscoring the importance of steady progress with the IMF programme to continually unlock financing”, it added.
Moody’s has estimated Pakistan’s external financing needs at about $24-25 billion in for this fiscal year and similar amounts again for the next fiscal year 2026-27, bringing the total needs to $50 billion.
The higher external debt repayments keep the Ministry of Finance in a tight position, which remains busy throughout the fiscal year in getting old loans refinanced. The ministry has played an important role in ensuring some semblance of fiscal prudence despite competing demands for additional budgets.
The rating agency said that the upgrade to Caa1 reflected Pakistan’s improving external position, supported by its progress in reform implementation under the IMF programme. The foreign exchange reserves are likely to continue to improve, although Pakistan will remain dependent on timely financing from official partners, it added.
Moody’s said that it expects further gradual improvements as progress in reform implementation under the IMF program supports financing from bilateral and multilateral partners but said that the foreign exchange reserves remain “still (at) fragile levels”.
It does not see any disruption in Pakistan’s external debt repayments for the next few years.
While commenting on the fiscal situation, Moody’s said that Pakistan’s fiscal position was also strengthening from very weak levels, supported by an expanding tax base.
The “debt affordability has improved, but remains one of the weakest among rated sovereigns”, it added.
Moody’s said that the country’s overall budget deficits were narrowing and primary surpluses were widening. The government debt affordability was also improving, although it remains one of the weakest among our rated sovereigns.
But it warned that there remains risks of delays in reform implementation required to secure timely official financing, which would in turn weaken Pakistan’s external position again.
Strengthening fiscal position
The rating agency said that the government has strengthened its revenue collection through a combination of better enforcement and new tax measures. The total revenues rose to about 16% of GDP in the last fiscal year from 12.6%, led by a large increase in tax revenues, amounting to about 2% of the GDP.
The government’s non-tax revenues also rose sharply due to a one-off extraordinary dividend from the State Bank of Pakistan.
It has estimated tax revenues to pick up by another half percentage points of GDP in this fiscal year but said that a decline in SBP dividends will lead to an overall narrowing of government revenue to about 15-15.5% of GDP.
The rating agency said that the government was facing a significant challenge to continually implement revenue-raising measures without triggering social tensions.
It hoped that the government would keep a control on expenditures, “even as budgeted defense spending has increased” after war with India. The government has gradually cut subsidies to the power sector alongside progress with energy sector reforms.
While commenting on the debt position, the rating agency said that the debt servicing costs are also reduced due to declining domestic interest rates in tandem with lower policy rates.
“Overall, we expect the fiscal deficit to narrow further to 4.5-5% of GDP in this fiscal year”. In the last fiscal year, the government’s deficit was 5.4% of the GDP, which was better than the target.
Due to reduction in the interest rates, the interest payments would amount to about 40-45% of revenues in this and next fiscal year, which is a marked decline from about 60% in FY2024. But the rating agency said that the interest payments were very high internationally and a key credit constraint.
It cautioned that there remains risk of slippage in reform implementation or results, leading to delays in or withdrawing of financing support from official partners. This could in turn lead to renewed material deterioration in the sovereign’s external position, it added.
