Local, forex issuer and senior unsecured: Moody's upgrades debt ratings to ‘Caa1'
The rating agency also upgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)Caa2 and concurrently, changed the outlook for the government of Pakistan to stable from positive.
The upgrade to Caa1 reflects Pakistan's improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility (EFF) program. Foreign exchange reserves are likely to continue to improve, although Pakistan will remain dependent on timely financing from official partners, it added.
Govt presents 'compelling evidence' of Pakistan's economic recovery to Moody's
Moody's said the upgrade to Caa1 reflects Pakistan's improving external position, supported by its progress in reform implementation under the International Monetary Fund (IMF) Extended Fund Facility (EFF) programme. It said foreign exchange reserves are likely to continue to improve, although Pakistan will remain dependent on timely financing from official partners.
The rating agency said that the sovereign's fiscal position is also strengthening from very weak levels, supported by an expanding tax base. Its debt affordability has improved, but remains one of the weakest among rated sovereigns. The Caa1 rating also incorporates the country's weak governance and high political uncertainty.
In the report it is further stated that the stable outlook reflects balanced risks to Pakistan's credit profile. 'On the upside, improvements in the debt service burden and external profile could be more rapid than we currently expect. On the downside, there remains risks of delays in reform implementation required to secure timely official financing, which would in turn weaken Pakistan's external position again,' Moody's remarked. Moody's said the upgrade to Caa1 from Caa2 rating also applies to the backed foreign currency senior unsecured ratings for 'The Pakistan Global Sukuk Programme Co Ltd'. 'The associated payment obligations are, in our view, direct obligations of the Government of Pakistan. Concurrently, we changed the outlook for The Pakistan Global Sukuk Programme Co Ltd to stable from positive, mirroring the stable outlook on the Government of Pakistan', it added.
Concurrent to this action, Moody's also raised Pakistan's local and foreign currency country ceilings to B2 and Caa1 from B3 and Caa2, respectively. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government's relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk. The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness. It also takes into account risks of transfer and convertibility restrictions being imposed.
Moody's further stated Pakistan's external position has continued to strengthen over the past year. 'We expect further gradual improvements as progress in reform implementation under the IMF program supports financing from bilateral and multilateral partners. In turn, this contributes to continued increases in the sovereign's foreign exchange reserves, albeit from still fragile levels,' Moody's added.
Moody's said Pakistan fully met its external debt obligations and added to its foreign exchange reserves in fiscal year 2025 (ending June 2025). Reserves rose to $14.3 billion as of 25 July 2025, equivalent to about ten weeks of imports. This compares with $9.4 billion at the time of its last rating action in August 2024, and is about triple the level compared to end-June 2023.
The agency stated that 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 (ADB).
Moody's 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. It stated the sovereign has unlocked new sources of financing with a 28-month arrangement under the IMF Resilience and Sustainability Facility (RSF) worth about $1.4 billion and a ten-year country partnership framework with the World Bank for fiscal year 2026-2035, with an indicative financing envelope of $20 billion.
Moody's pointed out that Pakistan's external position remains fragile. Its foreign exchange reserves remain well below what is required to meet is external debt obligations, underscoring the importance of steady progress with the IMF programme to continually unlock financing. It estimates Pakistan's external financing needs are about $24-25 billion in fiscal year 2026, and similar amounts again in fiscal year 2027.
Moody's said Pakistan's fiscal position has improved from very weak levels, reflecting progress in implementing revenue-raising measures. The budget deficits are narrowing and primary surpluses are widening. The government debt affordability is also improving, although it remains one of the weakest among our rated sovereigns.
The government has strengthened its revenue collection through a combination of better enforcement and new tax measures. Government revenues rose to about 16 percent of GDP in fiscal year 2025 from 12.6 percent in fiscal year 2024, led by a large increase in tax revenues, amounting to about 2 percentage points of GDP. The government's non-tax revenues also rose sharply due to a one-off extraordinary dividend from the State Bank of Pakistan (SBP), the central bank.
'We expect the government to continue enhancing revenue administration and compliance, alongside the introduction of new tax measures. We estimate tax revenues to pick up by another 0.5 percentage points of GDP in fiscal year 2026. However, a decline in SBP dividends will lead to an overall narrowing of government revenue to about 15-15.5 percent of GDP,' it added.
The rating agency stated that it expects the government expenditure to remain contained, even as budgeted defence spending has increased. The government has gradually cut subsidies to the power sector alongside progress with energy sector reforms. Debt servicing costs are also reduced due to declining domestic interest rates in tandem with lower policy rates.
Overall, the fiscal deficit is expected to narrow further to 4.5-5percent of GDP in fiscal year 2026 (FY2025: 5.4 percent). At the same time, we expect government interest payments to absorb about 40-45percent of revenue in 2026-2027, which is a marked decline from about 60 percent in fiscal year 2024, but remains very high internationally and a key credit constraint, it added.
On the upside, improvements in the debt service burden and external profile could be more significant than it currently expect. A building track-record of reforms, including revenue-raising measures, that effectively safeguard macroeconomic stability could unlock more financing. In turn, this would further strengthen foreign exchange reserves and the sovereign's external position. Pakistan's debt affordability may also improve more significantly than it currently forecast. This could come from the government implementing additional revenue measures that broaden the tax base more than it currently assume.
On the downside, there remains risks 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. A number of previous IMF programmes were not completed, in part reflecting weak governance and institutional strength, compounded by a challenging domestic political environment.
Moody's said the ratings would likely be upgraded if Pakistan's debt affordability and external position improved significantly, beyond its current expectations. This would likely be linked to marked progress in reform implementation which would accelerate external financing from official and commercial sources. Continued fiscal consolidation, including through implementing revenue-raising measures, pointing to a meaningful improvement in debt affordability beyond our current expectations would also be credit positive.
The rating agency said the ratings would likely be downgraded if there were evidence of a renewed material increase in government liquidity or external vulnerability risks. This could come from financing strains due to delays in or withdrawal of support from multilateral and bilateral partners, leading to a rapid and significant decline in the foreign exchange reserves. An increase in social and political risks that disrupted policymaking and undermined Pakistan's ability to secure financing would also be credit negative.
Copyright Business Recorder, 2025
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