Moody's upgrades Pakistan's banking sector outlook to positive
Moody's, a global credit rating agency, has revised Pakistan's banking sector outlook from stable to positive, attributing the change to stronger financial performance and a recovery in macroeconomic conditions from last year's downturn.
The agency's latest report noted that Pakistan's banks are heavily invested in government securities, holding around 50% of their total assets in sovereign bonds. The upgrade reflects a more favorable liquidity position and improved external financing conditions, in line with the government's positive credit rating trend.
According to Moody's, the outlook upgrade aligns with the improved sovereign credit rating of Pakistan as banks remain highly exposed to government risk through their substantial holdings of sovereign debt.
The agency noted that the country's fiscal and monetary measures, coupled with an International Monetary Fund (IMF) programme, have helped stabilise its economy.
Pakistan's economy has shown signs of recovery, with Moody's forecasting a GDP growth rate of 3% for 2025, up from 2.5% in 2024 and a contraction of 0.2% in 2023.
Inflation, which had surged to an average of 23% in 2024, is expected to ease significantly to around 8% in 2025.
The rating agency highlighted that the 37-month, $7 billion IMF Extended Fund Facility, approved in September 2024, has provided a crucial buffer for Pakistan's external financing needs. This, along with policy reforms, has improved investor confidence and stabilised the financial sector.
Despite the upgrade, Moody's warned that risks remain, particularly regarding Pakistan's high dependency on external funding, fiscal discipline, and political stability. The banking sector's exposure to government securities also poses a risk in case of any sovereign distress.
Financial experts believe that while the positive outlook is a step forward, sustainable economic growth will require structural reforms, including improvements in tax collection, governance, and foreign direct investment.
Moody's Investors Service has periodically adjusted Pakistan's credit rating in response to the country's evolving economic landscape. In October 2022, the agency downgraded Pakistan's sovereign credit rating from B3 to Caa1, highlighting increased government liquidity and external vulnerability risks, which were exacerbated by devastating floods that severely impacted the economy.
The situation further deteriorated by March 2023, leading Moody's to lower the rating to Caa3. This decision was driven by a fragile liquidity position and critically low foreign exchange reserves, raising concerns about Pakistan's ability to meet its external debt obligations.
However, by August 2024, signs of economic recovery emerged. Moody's upgraded Pakistan's rating to Caa2, reflecting improved macroeconomic conditions and the approval of a $7 billion IMF Extended Fund Facility, which bolstered the country's external financing prospects.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Express Tribune
5 hours ago
- Express Tribune
Trade deficit widens 44% in July
Listen to article As Pakistan's trade deficit widened 44% in July due to a sharp rise in imports, Planning Minister Ahsan Iqbal on Tuesday expressed hope that it would be a "temporary dip," likely to be offset by an increase in exports driven by higher imports of raw materials. While launching the first monthly development report for the fiscal year 2025-26, the minister said the benefit of the lowest US tariffs on Pakistan in the region would depend on exporters' ability to seize the opportunity by penetrating foreign markets. The 44% higher trade deficit in July "is a temporary dip and will be offset by the increase in exports" in coming months, Iqbal said, when asked if the sudden jump was linked to the government's policy of opening the economy for foreign competition. The government reduced import tariffs in the budget as part of conditions set by the International Monetary Fund (IMF) and the World Bank. The Pakistan Bureau of Statistics (PBS) reported last week that the trade deficit rose to $2.7 billion, or 44% higher, in July. Authorities said it was too early to assess the impact of trade liberalisation, noting one possible reason for the surge in imports was that importers had delayed consignments to benefit from reduced rates starting in the new fiscal year. Iqbal said the government had revised the initial trade liberalisation plan by lowering duties only on items that could boost exports. He added that macroeconomic stability had strengthened, with exports posting a 17% increase in July, which was a reflection of external sector stability. In July, exports grew by 16.9%, reaching $2.7 billion from $2.3 billion in the same month last year, according to the Planning Commission's monthly report. It added that foreign remittances rose 7.4% last month to $3.2 billion, indicating growing confidence among overseas Pakistanis in the government's economic management and overall stability. When asked about the impact of the US trade deal, under which Pakistan agreed to zero tariffs on over 4,100 tariff lines in exchange for a 19% additional customs duty rate, Iqbal said exporters should capitalise on the lowest tariffs on Pakistan compared to the region. Former US President Donald Trump imposed a 19% additional tariff on Pakistani exports, compared to around 20% for the region, except India which faces a 50% additional tariff. The Pak-US trade deal should not be viewed merely in terms of the number of tariff lines receiving relief, said Dr Imtiaz Ahmad, Pakistan's chief economist, but in the context of a gradual increase in foreign direct investment. The government hopes investors from regional countries will set up operations in Pakistan to export goods to US and EU markets. However, the fine details of the trade deal, including rules of origin, are yet to be finalised. The national development report stated that Pakistan entered the new fiscal year with stronger economic performance, marked by improved fiscal management, a turnaround in the external sector from deficit to surplus, falling inflation, and renewed investor confidence. Despite the IMF's warning of slower global growth and persistent downside risks, Pakistan has achieved macroeconomic stability, said Iqbal. He added that at a time when global uncertainty weighs on developing economies, Pakistan's policy-driven turnaround signals a notable shift in its economic trajectory and a promising start to FY2026. Strong fiscal consolidation reduced the deficit to 5.4% of GDP in FY2025, down from 6.9% the previous year. The external sector posted a $2.1 billion current account surplus, driven by higher exports and record remittances, he said. Iqbal further stated that revised accounts from the Accountant General of Pakistan Revenue (AGPR) showed total development spending in the last fiscal year rose to Rs1.068 trillion, which is a new record. The government had earlier reported Rs1.048 trillion in spending in the fiscal operations data released by the Ministry of Finance last week. The Public Sector Development Programme (PSDP) spending now equals 98% of the total annual development budget. In FY2025, 260 projects were monitored, with 40 of strategic nature evaluated. For FY2025-26, the target is to monitor 251 projects and evaluate 50, he said. Iqbal again criticised the finance ministry's strategy of releasing 40% of the total budget in the last quarter, which he argued leads to wastage and strains budgetary resources. "We are in discussions with the Finance Division to withhold only 30% of the total budget for the last quarter and disburse the rest in the first three quarters," said Iqbal. The finance ministry's current quarterly release strategy allows 15% spending in the first quarter, 20% in the second, 25% in the third, and 40% in the last quarter.
Express Tribune
a day ago
- Express Tribune
IMF flags gaps in Pak corruption detection
The identification of politically exposed persons remained uneven and there were insufficient corruption-specific red-flags that could detect misuse of the public office in Pakistan, according to initial findings by a corruption diagnostic assessment mission of the International Monetary Fund (IMF). The IMF has shared the draft observations along with recommendations with the government, giving Islamabad an opportunity to review these before the Governance and Corruption Diagnostic Assessment report is released by the end of this month, sources told The Express Tribune. "The effectiveness of the politically exposed persons' identification remains uneven across sectors due to limited access to comprehensive data, absence of automated screening tools in smaller institutions, and a lack of corruption-specific red flag indicators that would help detect misuse of public office, stated the draft report. The lender has recommended issuing new guidelines by learning from the best global practices to identify the misuse of the public office and check any corruption in the government contracts. Pakistan committed to the IMF in September last year that it would fully publish the report once it is completed. Under the $7 billion deal, the IMF had dispatched the Governance and Corruption Diagnostic Assessment Mission to Pakistan this year, which met with about three-dozen government and state institutions. On the request of Pakistan, the IMF had extended the deadline to publish the report from July to the end of August this year. The politically exposed persons include the head of the state, the head of the government, politicians, bureaucrats, judiciary, military officials, and senior executives of the state-owned enterprises, ambassadors and the members of parliament. There are special checks for the opening and operations of bank accounts of the politically exposed persons. Whereas the report has identified some major gaps, it has also acknowledged the efforts that the Pakistani authorities made to put in place a basic structure to minimise the chances of corruption and the misuse of the public office by politically exposed persons. The draft report states that the identification of the politically exposed persons is guided by regulatory requirements issued by the State Bank of Pakistan (SBP), the Securities and Exchange Commission of Pakistan (SECP), and the Federal Board of Revenue (FBR) for their respective supervised entities. It added that the Financial Institutions and Designated Non-Financial Businesses and Persons (DNFBPs) are required to apply enhanced due diligence measures before dealing with the politically exposed persons. The enhanced scrutiny measures include obtaining senior management approval, establishing the source of wealth, and conducting ongoing monitoring. But smaller institutions do not effectively apply these safeguards, observed the special mission in its draft. The draft stated that the institutions are largely responsible for developing their own internal systems to identify and manage the risks beyond the official lists given by the regulators. The draft report further stated that reporting institutions to the regulators often lacked clarity on corruption-specific typologies and risk indicators. Sources said that the IMF was of the view that despite the specious transaction report guidelines and the red-flag indicators for various sectors and typologies, reporting institutions have limited access to typologies that reflect common methods of laundering corruption proceeds. As part of the safeguards, the FBR had also established an online platform through which financial institutions can screen customers against official lists of federal public officials, including senior civil servants serving in grade 17 to 22 and members of parliament. The sources said that the IMF has referred to some best international practices adopted by countries like Canada and Colombia, which helped mitigate chances of corruption through better detection of cases. Canada has published red flag indicators for transactions involving government contracts, municipal procurement, and politically exposed persons' related behaviour, use of corporate entities or consultants in public sector schemes, and layered payments, rapid contract turnover, and unexplained wealth accumulation in low-salary public roles. Likewise, Colombia's financial intelligence unit developed sectoral indicators targeting healthcare procurement during Covid pandemic, SOE-linked laundering via construction firms and extractive industries, and payments routed through regional entities to avoid detection. The sources said that Pakistan could benefit from issuing specific guidance on identifying unusual financial behaviour linked to the politically exposed persons and state contracts. The spokesman of the Ministry of Finance did not respond to the questions whether the consultations on the IMF findings have been completed and would the report be published by end of this month. The sources said that the Ministry of Finance had given last Friday a deadline to the various departments to respond to the IMF's observations and recommendations. Some of the entities have accepted a few observations while others have sought revisions by disagreeing with the IMF's findings. The sources said that due to the cumbersome process involved in going through every recommendation, there is a possibility that the government may take longer than required time to publish the document.
Business Recorder
2 days ago
- Business Recorder
KSE-100 soars to all-time peak amid investor optimism
The Pakistan Stock Exchange (PSX) soared to a historic high on Monday as investor sentiment became bullish due to economic and corporate developments, with the benchmark KSE-100 Index closing with an increase of over 1,500 points. Bullish momentum was observed throughout the trading session, pushing the benchmark index to an intra-day high of 147,005.17. At close, the KSE-100 Index settled at 146,929.84, an increase of 1,547.05 points or 1.06%. Analysts attributed the positive momentum to several positive macroeconomic and corporate factors. 'The continuity of the IMF programme' is providing policy stability and ensuring the implementation of critical fiscal and structural reforms, Saad Hanif, Head of Research at Ismail Iqbal Securities, told Business Recorder. 'This is complemented by a better external and fiscal account position.' The market expert added that the investor sentiments are further bolstered by attractive valuations, making equities appealing compared to other asset classes, including real estate, which remains largely stagnant. Moreover, strong corporate performance, with several listed companies reporting all-time high profits, is also adding to the momentum. 'All this makes a very good ground for the ongoing rally,' he said. During the previous week, PSX extended its winning streak with the benchmark KSE-100 Index surging by 4,348 points, or 3.1%, to close at an all-time high of 145,383. Internationally, major share indexes crept higher in Asia on Monday as upbeat company earnings underpinned high valuations in the tech sector, while a crucial report on US inflation would likely set the course of the dollar and bonds. Trade and geopolitics also loom large with a US tariff deadline on China due to expire on Tuesday amid expectations it will get extended again, while President Donald Trump and Russian leader Vladimir Putin are due to meet in Alaska on Friday to discuss Ukraine. The main economic release will be US consumer prices on Tuesday, with analysts expecting the impact of tariffs to help nudge the core up 0.3% to an annual pace of 3.0% and away from the Federal Reserve target of 2%. An upside surprise would challenge market wagers for a September rate cut, though analysts assume it would have to be a very high number, given a downward turn in payrolls is now dominating the outlook. Markets imply around a 90% probability of a September easing, and at least one more cut by year-end. Trump's pick for Fed governor, Stephen Miran, may or may not be in place in time to vote for a cut in September, while the choice of a new chair has broadened out to around 10 contenders. The prospect of lower borrowing costs has supported equities, along with a run of strong earnings. This is an intra-day update
