After Fitch and S&P, Moody's upgrades Pakistan credit's rating, but flags ‘fragile' external position

Indian Express

2 days ago

Moody's Ratings on Wednesday upgraded Pakistan's sovereign credit rating to Caa1 from Caa2, with the outlook being changed to stable from positive, on the back of its improving external position that nonetheless remains 'fragile' and supported by multilateral agencies such as the International Monetary Fund (IMF) and the Asian Development Bank (ADB).
'We expect Pakistan to fully meet its external debt obligations for the next few years, contingent on steady progress on reform implementation and timely completion of IMF reviews… Nonetheless, 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,' the rating agency said in a statement.
While Moody's says 'Caa' ratings are judged to be of 'poor standing', Fitch describes 'B' ratings as 'highly speculative'. S&P, meanwhile, calls 'B' ratings 'speculative grade'.
The rating upgrade for Pakistan comes after it met its external debt payments in the fiscal year ended June while increasing its foreign exchange reserves, which stood at $14.3 billion as of July 25, up from $9.4 billion in August 2024.
'Notably, Pakistan successfully completed the first review of the IMF programme on schedule, unlocking a $1 billion disbursement from the IMF in May 2025. It also secured a $1 billion commercial loan in June 2025, with a $500 million policy-based guarantee by the Asian Development Bank,' Moody's said. The rating agency also noted the 28-month arrangement Pakistan had struck with the IMF under its Resilience and Sustainability Facility for about $1.4 billion and a 10-year country partnership framework with the World Bank 'with an indicative financing envelope of $20 billion'.
In the aftermath of the Pahalgam terror attack in April, India had questioned the IMF and ADB's continued support of Pakistan. On May 9, even as the IMF approved a $1-billion loan to Pakistan following the first review of its economic reform programme under the so-called Extended Fund Facility (EFF), India abstained from voting at the meeting. India had then voiced concerns over the efficacy of IMF programmes for Pakistan given its 'poor track record' and the possibility that the money could be misused for 'state-sponsored cross-border terrorism'.
IMF staff will visit Pakistan in the second half of 2025 for the next EFF review. The 37-month-long programme, approved in September 2024 with a total size of around $7 billion, will see six reviews of the economic progress made by Pakistan.
A $800-million programme approved by the ADB to Pakistan in early June saw India raise 'deep concerns' about the possibility of misuse of funds. The programme is to strengthen fiscal sustainability and improve public financial management.
A combination of weak growth, high inflation, falling foreign exchange reserves, and poor government finances has weakened Pakistan's economy. In the fiscal year that ended in June, Pakistan's GDP grew 2.7 per cent, well below the government's initial target of 3.6 per cent. Retail inflation, meanwhile, rose to 4.1 per cent in July.
As per IMF data, Pakistan's general government debt stood at 70 per cent of GDP in 2024.
Like on the external front, Moody's said Wednesday that the Pakistan government's finances had improved from 'very weak levels' due to progress made to raise revenues. And while government debt affordability is improving, it remains 'one of the weakest among our rated sovereigns'.
'Overall, we expect the fiscal deficit to narrow further to 4.5-5 per cent of GDP in FY2026 (FY2025: 5.4 per cent). At the same time, we expect government interest payments to absorb about 40-45 per cent of revenue in FY2026-2027, which is a marked decline from about 60 per cent in FY2024, but remains very high internationally and a key credit constraint,' Moody's said.