Upgrade by Moody's
Pakistan's debt rating by Moody's has increased from Caa2 to Caa1 with a stable outlook. That is good, but the rating is still in the deep junk category; it remains below the levels needed to attract foreign investment and debt at cheaper rates.
The government, therefore, may now think about issuing debt in the international debt market. The finance minister has already shown intentions of reaching out to China's Panda Bond market, which is to be followed by issuing fresh Euro or Sukuk bonds. The plan is to issue both in the current fiscal year. However, rates may not be the best at the current credit rating.
The government hopes the US Fed will start slashing interest rates as there are signs that this may happen. This is expected to bring the absolute rates for Pakistan to lower levels while keeping the same risk premium. That, in turn, would help improve the credit rating further and reduce the fragility of the external accounts.
However, the situation is still very fragile, and any internal or external shock can take away all the gains. The problem is not as fluid as it was in 2023, with no immediate risk of default, but there is no room for complacency.
The issue is that although stability is here, there are no signs of attaining growth and generating much-needed employment. The forex reserves build-up is slow and contingent upon managing the current account.
Last year, the conversion of informal to formal remittances created some space, but similar growth is not expected this year. Export growth is constrained too, and general exporters are not expecting any significant jump in exports to the US after getting the deal as other competitive issues still very much persist.
An axe continues to fall on imports, and without letting imports grow freely, economic growth will remain elusive. However, there is a marginal pickup in imports, and that stirs the foreign exchange market. What the country needs is an uptick in foreign investment. There are no signs of this. The stock market is making records, but foreigners remain net sellers. They are not buying the story.
They usually see a growth story and invest based on that. The behaviour of FDI (foreign direct investment) is similar. Investors seek long-term stability, as investment returns typically come with a lag. The historic trends are not encouraging. Banking and telecom companies that invested during the boom of 2002–07 have either exited at a loss or are still in search of a profitable bottom line in USD terms.
The mantra of getting tens of billions of US dollars of investment from friendly countries in the Middle East is fizzling out. Even Saudi investment in Reko Diq is not happening. The second round of the CPEC is still in talks, as was the case five years ago.
Now the authorities are eyeing the US to invest. The romance of Pakistan's authorities is growing with the Trump administration, which is partially due to the latter's anger towards India.
The strategic goals of the US are aligned with India, which raises questions about the sustainability of good US relations with Pakistan. The real gain is to have foreign investment based on economic fundamentals. For that, the ratings have to be in the investment grade. Until that happens, the action will continue to miss, while the rating improvement is nothing more than a headline.
Copyright Business Recorder, 2025
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