First Upgrade in a Year Moves Pakistan Away from Default Risk
Global credit rating agency Moody’s has upgraded Pakistan’s long-term local and foreign currency issuer and senior unsecured debt ratings from Caa2 to Caa1, moving the country further away from the brink of default. The outlook has also been revised from positive to stable, reflecting balanced risks to the nation’s credit profile.
Reserves Improve but External Position Still Fragile
The upgrade, the first in a year, comes as Pakistan’s external and fiscal positions show signs of improvement, supported by progress on reform measures under the International Monetary Fund’s Extended Fund Facility (EFF). Moody’s noted that foreign exchange reserves have risen to $14.3 billion as of July 25, 2025, up from $9.4bn in August 2024, equivalent to around ten weeks of imports.
Despite the improvement, Moody’s cautioned that the external position remains fragile, with reserves still below the level needed to comfortably meet debt obligations. External financing needs are estimated at $24–25 billion annually for FY2026 and FY2027.
Fiscal Reforms Strengthen Revenue and Debt Affordability
On the fiscal side, Moody’s observed narrowing budget deficits and expanding primary surpluses. Revenue collection has strengthened, rising from 12.6% to around 16% of GDP in the last fiscal year, driven by improved enforcement and new tax measures. However, the overall revenue-to-GDP ratio is expected to slightly dip to 15–15.5% in FY2026 due to lower State Bank dividends. Debt affordability has improved but remains among the weakest of rated sovereigns, with interest payments still consuming an estimated 40–45% of revenues despite declining domestic interest rates.
Reform Continuity Key to Sustaining Progress
The rating agency stressed that maintaining reform momentum is critical. Any delays could weaken the external position and erode investor confidence. Still, Moody’s acknowledged that Pakistan has met its external debt obligations and strengthened its macroeconomic fundamentals over the past 18 months.
Business Leaders Welcome Upgrade as Economic Boost
The business community hailed the development as a milestone for Pakistan’s economy. Lahore Chamber of Commerce and Industry (LCCI) President Mian Abuzar Shad said the upgrade signals stability and vast opportunities for foreign investors, potentially boosting foreign direct investment, job creation, and exports. Former FPCCI President Mian Anjum Nisar called it a strong endorsement of Pakistan’s global standing and urged active economic diplomacy to translate the improved rating into trade deals and investment flows.
All Three Global Agencies Now Hold Stable Outlook
With upgrades now from all three major global rating agencies, Moody’s, Fitch, and S&P Global Ratings, Pakistan is positioned to strengthen investor sentiment, although it remains below investment grade and is unable to issue international sovereign bonds at competitive rates.
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