Tariffs, geopolitical tensions: IMF warns Pakistan of rising external risks
The Fund in its latest report also stated that domestic political economy pressures to unwind and delay reforms remain present and may intensify, which would quickly eviscerate Pakistan's hard-won economic stability.
Uncertainties around the impact of recent tariff announcements on Pakistan's economic and financial conditions are significant, with risks skewed to the downside.
Trade tensions to affect Pakistan more in region: IMF
More broadly, geopolitically driven increases incommodity prices, tightening in global financial conditions, weakening of remittances, or higher trade barriers in other trading partners could adversely affect external stability. The other main immediate risk relates to policy slippages given pressures to ease policies and provide tax and other concessions and subsidies to connected interests.
The report further noted that an intensification of political or social tensions could also weigh on policy and reform implementation. Finally, climate-related risks are substantial, driven by both Pakistan's high exposure to natural disasters and large adaptation and mitigation needs.
Amid an increasingly uncertain external environment, geopolitical frictions could adversely impact external stability via higher commodity prices, a tightening in global financial conditions, or greater protectionism in key trading partners. Considering Pakistan's high exposure to natural disasters, weather-related events could further elevate fiscal and external pressures.
In view of this, it is critical that policy and structural reforms are implemented consistently, and delays or slippages are avoided as they could jeopardize the nascent economic recovery and the path to debt and external sustainability, and could adversely impact the external financing outlook, including from bilateral partners, it added.
IMF further stated that part of Pakistan's challenge is a lack of policy consistency and continuity. Policies, budgets, and programs related to climate risk have thus far been subject to changing political currents. As a result, although climate-change issues have featured in Pakistan's overall development policies since the 2012 National Development Strategy (NDS), specific actions or implementation steps have been lacking.
The first National Climate Change Policy (NCCP 2012) provided guidelines for developing national adaptation and mitigation plans across sectors, but in practice, it had little impact on sectoral programs. Three years later, in its first Intended Nationally Determined Contribution (INDC 2015), Pakistan made a handful of very limited commitments to mitigation and adaptation but has not moved significantly beyond that point.
One reason is that government ownership of climate change policy and responsibilities for action has been fragmented. For the past several years, this responsibility has shifted between different institutions and levels, with blurred lines of responsibility and weak forms of accountability.
Additionally, challenges exist in transferring environmental, water, agriculture and climate-change policies and programs from the national level down to the provincial level, and across sectors.
With the advent of devolution in Pakistan, the provinces became responsible for sectoral policies and implementation within their respective jurisdictions.
As a result, although the Ministry of Climate Change has the overall mandate for climate change policy, each province has its own Environmental Protection Agency (EPA) responsible for environmental policy and programs within that province. This includes climate-change mitigation and adaptation measures. Two provinces have also set up climate-change centres under their EPAs.
Copyright Business Recorder, 2025
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Local, forex issuer and senior unsecured: Moody's upgrades debt ratings to ‘Caa1'
ISLAMABAD: Moody's Ratings (Moody's) on Wednesday upgraded the government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2. 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. 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What does Moody's upgraded rating signify for Pakistan?
Moody's Ratings upgraded on Wednesday Pakistan's long-term sovereign credit rating to Caa1 from Caa2, citing improved external liquidity and a stronger short-term repayment outlook following continued engagement with the International Monetary Fund (IMF) and bilateral lenders. However, the stable outlook also underscores lingering structural vulnerabilities. According to Moody's, the upgrade reflects 'reduced default risk' as Pakistan's foreign exchange reserves have risen, aided by disbursements under the IMF's ongoing programme and rollovers of maturing bilateral debt. The country's import coverage has improved to over two months, compared to less than a month in early 2023, easing immediate balance-of-payments pressures. However, in the sovereign rating hierarchy, Caa1 still places Pakistan in the highly speculative category, several notches below investment grade. At this level, borrowing costs in global markets remain elevated and investor participation is largely limited to high-yield and frontier market funds. Pakistan's external financing needs remain high, driven by large current account requirements and significant debt repayments in the coming years. Moody's warned that without sustained reforms and a continued IMF anchor, the fiscal position could quickly deteriorate again. The upgrade is therefore more symbolic than transformative - signaling a step away from imminent default, but not yet a return to market normalcy. Finance Minister Aurangzeb optimistic on policy rate cut Market reaction was measured. The rupee strengthened slightly against the US dollar, while Pakistan's 2026 Eurobond yield fell by 25 basis points, reflecting modest confidence gains. Analysts noted that the rating change could help attract incremental portfolio inflows and smooth bilateral negotiations, but would not, by itself, restore Pakistan's access to affordable international debt markets. Moody's last upgraded Pakistan in August 2024, from Caa3 to Caa2, after the IMF approved a new loan programme. Today's move builds on that momentum, but economists caution that the country must maintain reform discipline through 2026 to preserve recent stability. Understanding Moody's ratings: Where Caa1 stands Moody's assigns sovereign credit ratings from highest quality (Aaa) to lowest (C). Each category signals the agency's view of a country's ability and willingness to repay debt. Aaa, Aa1-Aa3, A1-A3: Very strong to adequate capacity to meet debt obligations Baa1-Baa3: Countries in this range borrow at relatively low interest rates B1-B3: Significant credit risk; vulnerable to adverse developments Caa1- Caa3: Very high credit risk, dependent on favorable conditions to meet obligations Ca: Likely in, or very close to, default, with some recovery possible.
