Moody’s Upgrades Pakistan’s Credit Rating to Caa1, Outlook Shifted to Stable
Moody’s Investors Service has upgraded Pakistan’s long-term foreign currency credit rating from Caa2 to Caa1, reflecting notable improvements in the country’s external financial stability. The credit outlook has been revised from positive to stable, signaling renewed global confidence in Pakistan’s economic direction.
This upgrade shows rising optimism about Pakistan’s ability to manage foreign debt repayments, strengthen foreign exchange reserves, and expand its tax base — despite political uncertainties and governance challenges.
The rating boost also applies to the Pakistan Global Sukuk Programme Co. Ltd, with its backed foreign currency senior unsecured ratings moving to stable. Moreover, the country’s local currency ceiling has been raised from B3 to B2, and the foreign currency ceiling from Caa2 to Caa1.
Improved External Position
Moody’s credited Pakistan’s strengthened external position to steady reforms under the IMF program. Foreign exchange reserves surged to $14.3 billion as of July 25, 2025 — equivalent to ten weeks of import cover — compared to $9.4 billion in August 2024 and triple the amount recorded in June 2023.
Key milestones fueling this improvement include:
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Completion of the IMF program’s first review in May 2025, unlocking $1 billion in funding.
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Securing a $1 billion commercial loan backed by a $500 million guarantee from the Asian Development Bank (ADB).
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Accessing $1.4 billion through the IMF’s Resilience and Sustainability Facility (RSF).
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Signing a 10-year partnership framework with the World Bank worth $20 billion in indicative financing.
Caution Over External Vulnerabilities
Despite these gains, Moody’s warned that Pakistan’s external position remains fragile. Current reserves, though improved, still fall short of the levels needed to comfortably meet debt obligations. The nation’s external financing requirements are projected at $24–25 billion annually over the next two fiscal years — highlighting the urgent need for consistent reforms and timely financing.
Fiscal Gains and Ongoing Challenges
On the fiscal front, Pakistan’s revenues grew to 16% of GDP in FY2025, up from 12.6% in FY2024, mainly due to enhanced tax collection and new revenue policies. The fiscal deficit narrowed to 5.4% of GDP, with further improvement expected in FY2026.
However, debt affordability remains a challenge. Interest payments are estimated to consume 40–45% of government revenues by FY2026-27 — a drop from 60% in FY2024 but still high compared to global standards. Limited fiscal space and governance issues also constrain the government’s ability to address social and environmental challenges like climate change, water scarcity, and inadequate public services.
Stable Outlook – Balanced Risks
The stable outlook reflects a balance between potential upsides and risks.
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Upside potential: Faster improvements in reserves and debt affordability could lead to further rating upgrades.
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Downside risk: Any delay in reforms or external financing could weaken Pakistan’s position and revive vulnerabilities.
Moody’s stressed that sustained reform implementation, fiscal discipline, and resilience against environmental and social risks will be key to securing future upgrades. Conversely, renewed liquidity pressures or political instability could trigger a downgrade.
