Moody’s Investors Service has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings from Caa3 to Caa2.
This upgrade reflects the country’s improving macroeconomic conditions, enhanced government liquidity, and strengthened external positions. The decision marks a significant positive shift for Pakistan’s economy, which has faced numerous challenges in recent years.
One of the primary factors behind the upgrade is the staff-level agreement between Pakistan and the International Monetary Fund (IMF) for a $7 billion Extended Fund Facility (EFF). This agreement, reached in July 2024, has been instrumental in providing greater certainty regarding Pakistan’s external financing sources. The IMF deal is expected to bolster the country’s foreign exchange reserves and improve investor confidence, which are crucial for stabilizing the economy and fostering sustainable growth.
In its report, Moody’s highlighted that the Pakistani government has shown signs of improved liquidity and has taken steps to strengthen its external positions. These efforts are seen as key to navigating the country out of its economic difficulties. The increase in foreign exchange reserves and the recent steps to tighten monetary policy have also contributed to a more favorable economic outlook.
However, while the upgrade is a positive development, Moody’s cautioned that Pakistan’s debt sustainability risks remain high due to its weak debt affordability. The rating agency noted that interest payments are expected to absorb a significant portion of government revenue in the coming years. This high level of debt servicing cost poses a challenge for the government, limiting its fiscal flexibility and ability to invest in growth-enhancing sectors.
Additionally, Pakistan’s governance challenges and political uncertainty continue to be significant risks. Moody’s pointed out that ongoing political instability and policy unpredictability could undermine economic reforms and negatively affect investor confidence. The ability of the government to implement and sustain necessary reforms, especially those aimed at increasing revenue and reducing expenditures, will be crucial for improving fiscal discipline and reducing reliance on external financing.
The positive outlook assigned to Pakistan’s rating reflects the possibility that the government may be able to further reduce its liquidity and external vulnerability risks and achieve a better fiscal position than currently anticipated. This optimism is contingent on Pakistan’s ability to maintain its reform momentum and meet the conditions set forth by international financial institutions, particularly the IMF.
The IMF’s approval of the $7 billion bailout package remains a key milestone for Pakistan. The government remains optimistic about securing the approval, but the country’s ability to meet the IMF’s conditions will be essential. Failure to comply with these conditions could result in delays or withdrawal of support, which would have adverse effects on Pakistan’s economic stability and growth prospects.
Moody’s upgrade of Pakistan’s credit rating is a positive development that reflects the country’s progress in addressing macroeconomic challenges. However, the ongoing efforts to improve debt sustainability, enhance governance, and ensure political stability are critical for maintaining this momentum. The path ahead requires careful management of fiscal and external risks to build a resilient and sustainable economic future for Pakistan.
