Table of Contents
Moody’s Investors Service has raised Pakistan’s long-term foreign debt rating from Caa2 to Caa1, reflecting growing confidence in the country’s ability to manage its external obligations. The outlook has been revised from negative to stable, a move seen as a significant vote of confidence in Pakistan’s economic trajectory despite lingering political and governance challenges.
The upgrade also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, with the outlook similarly revised to stable. In addition, Pakistan’s local and foreign currency country ceilings have been lifted to B2 and Caa1, respectively, from B3 and Caa2.
Strengthening External Position
Moody’s cited Pakistan’s improving external position as a key driver of the upgrade. The agency noted that foreign exchange reserves have risen sharply, reaching $14.3 billion as of July 25, 2025, equivalent to about ten weeks of imports. This is a significant improvement compared to $9.4 billion in August 2024 and nearly triple the level recorded at the end of June 2023.
This strengthening has been supported by steady progress in implementing reforms under the International Monetary Fund (IMF) program. The successful completion of the first program review in May 2025 unlocked a $1 billion disbursement, while an additional $1 billion commercial loan—backed by a $500 million guarantee from the Asian Development Bank (ADB)—added to the reserve cushion.
Pakistan has also secured new financing sources, including a $1.4 billion arrangement under the IMF Resilience and Sustainability Facility (RSF) and a ten-year partnership framework with the World Bank, providing an indicative financing envelope of $20 billion for development and reform support.
Ongoing External Vulnerabilities
Despite these positive developments, Moody’s warned that Pakistan’s external position remains fragile. Foreign exchange reserves, though higher, still fall short of the levels needed to fully cover the country’s external debt obligations.
The rating agency estimated Pakistan’s annual external financing needs at $24–25 billion for each of the next two fiscal years. This means the government must maintain reform momentum and ensure timely financing from both multilateral and bilateral partners to avoid renewed liquidity stress.
Fiscal Gains and Remaining Challenges
On the fiscal front, Pakistan’s revenue performance has improved considerably. Government revenues climbed to 16% of GDP in FY2025 from 12.6% in FY2024, aided by stronger tax collection and new revenue measures. The fiscal deficit narrowed to 5.4% of GDP in FY2025, and further reductions are anticipated in FY2026.
Aima Pakistan Offers Independence Day Discounts on SIWA Scooters
However, debt affordability continues to weigh heavily on public finances. Moody’s projects that interest payments will consume 40–45% of government revenue in FY2026–27—down from 60% in FY2024, but still high compared to international benchmarks.
Moody’s noted that while fiscal reforms are advancing, weak governance and limited fiscal space continue to constrain the government’s ability to tackle social and environmental risks.
Balanced Outlook with Upside Potential
The stable outlook reflects Moody’s view that risks to Pakistan’s credit profile are evenly balanced. On the upside, faster-than-expected improvements in debt affordability and foreign reserves could pave the way for further upgrades.
Conversely, delays in reform implementation or financing inflows could weaken Pakistan’s external position and reintroduce vulnerabilities. The agency also emphasized Pakistan’s exposure to environmental and social risks—including climate change, water scarcity, and limited access to basic services—as long-term threats to economic resilience.
Path to Further Upgrades
Moody’s stated that any future rating improvements would hinge on:
- Significant and sustained gains in debt affordability
- Strengthening of foreign exchange reserves
- Continued fiscal consolidation and structural reforms
On the other hand, renewed liquidity pressures, financing constraints, or an escalation in political and social instability could lead to a downgrade.
With the IMF program serving as a critical policy anchor and multilateral financing continuing to support Pakistan’s reserve position, the government faces both an opportunity and a challenge: to lock in the progress made so far while addressing structural weaknesses that have historically kept the economy vulnerable to shocks.
