SINGAPORE: Moody’s Ratings has upgraded Pakistan’s local and foreign currency issuer ratings to B3 from Caa1, citing sustained macroeconomic stabilization and a material improvement in the country’s debt affordability and external position. The outlook for the sovereign remains stable.
The upgrade, announced Monday, reflects the ratings agency’s view that improvements in governance will enable the government to sustain recent gains in its external position and strengthen fiscal metrics. Moody’s also raised Pakistan’s senior unsecured debt ratings and the rating for its senior unsecured MTN program to (P)B3 from (P)Caa1.
Concurrent with the action, Moody’s raised Pakistan’s local and foreign currency country ceilings to B1 and B3, respectively, from B2 and Caa1.
External Vulnerabilities Ease
Moody’s said Pakistan’s external vulnerability risks have eased further since its last rating action in August 2025. Foreign exchange reserves have built steadily, increasing to about $17 billion at the end of July 2026, up from $14 billion a year earlier—sufficient to cover nearly three months of imports.
The agency’s estimate of Pakistan’s External Vulnerability Indicator, the ratio of short-term and long-term maturing debt to foreign exchange reserves, improved to about 145% in 2026, compared with 230% in 2025. Continued implementation of the International Monetary Fund-supported reform program has strengthened policy credibility and underpinned financing from official creditors, Moody’s said.
Pakistan has also regained gradual access to market financing, including a three-year, $750 million Eurobond issued in April and a CNY 1.75 billion debut Panda bond in May. These developments have enabled reserve accumulation while allowing Pakistan to meet all its external obligations in fiscal 2026.
Moody’s projects foreign exchange reserves will rise to between $19 billion and $20 billion by the end of fiscal 2027, and to $20 billion to $21 billion in fiscal 2028, assuming the government sustains progress on the IMF program.
Debt Affordability Shows Durable Improvement
Pakistan’s debt affordability has improved materially from very weak levels, Moody’s said. Interest payments absorbed about 35% of government revenue in fiscal 2026, down sharply from 49% in fiscal 2025. The improvement largely reflects a significant reduction in domestic interest rates following a sharp decline in inflation.
Although policy rates were subsequently raised modestly as inflation rebounded, they remained at a relatively low 11.5% in July 2026, down from a peak of 22% between June 2023 and May 2024. That has helped contain borrowing costs on domestic debt, which accounts for about two-thirds of total government debt.
Moody’s expects Pakistan’s debt affordability to remain broadly stable at about 35% for the next one to two years and to improve gradually thereafter as fiscal consolidation reduces the government’s debt burden and interest expenditure. The agency noted that while inflation remains sensitive to exchange-rate movements and external shocks, improved external buffers and the authorities’ commitment to fiscal consolidation should help contain pressures.
Still, Moody’s cautioned that the high share of government revenue absorbed by interest payments limits fiscal flexibility and the government’s capacity to address essential social spending and infrastructure needs. Constraints on attracting investment and ongoing domestic and geopolitical risks also continue to weigh on the rating.
Outlook Balances Improvements Against Lingering Vulnerabilities
The stable outlook balances a potentially faster improvement in Pakistan’s credit fundamentals against outstanding risks that could weaken access to foreign-currency financing and reduce fiscal flexibility, Moody’s said.
Pakistan’s external position remains structurally fragile, reflecting a small export base, very low foreign direct investment inflows, high dependence on remittances, and reliance on official and commercial financing. Weak FDI inflows underscore longstanding challenges in attracting investment, constraining productivity gains and export diversification.
Debt affordability, while improved, remains weak due to a still-narrow revenue base and high interest burden. Adverse economic shocks or a material deterioration in financing conditions could place renewed pressure on government finances.
Moody’s said an upgrade would likely follow if Pakistan’s external position and debt affordability improve materially beyond current expectations, backed by stronger policy effectiveness and a sustained reform track record. Conversely, a downgrade could occur if financing strains from delays in multilateral or bilateral support lead to a rapid decline in foreign exchange reserves, or if social and political risks disrupt policymaking and undermine access to financing.
The rating agency also cited Pakistan’s very high exposure to social and environmental risks and its weak governance profile as key constraints. The country’s vulnerability to climate change, limited access to clean water, and exposure to extreme weather events, such as the severe floods in 2022, add to fiscal and social costs, Moody’s noted.
