ISLAMABAD: Global ratings agency Moody’s has upgraded Pakistan’s sovereign credit rating to B3 from Caa1, maintaining a stable outlook and citing improvements in governance, stronger external buffers and easing fiscal and external vulnerabilities.
Moody’s said the upgrade reflected expectations that improvements in governance would enable the government to sustain recent gains in Pakistan’s external position while further strengthening fiscal metrics.
The agency noted that Pakistan’s external vulnerability risks had eased since its previous rating action in August 2025. Foreign exchange reserves have continued to build, supported by macroeconomic stabilisation, while lower domestic financing costs following monetary easing and an improved fiscal position have significantly strengthened the country’s debt affordability.
Moody’s also said Pakistan’s credit profile had demonstrated greater resilience to external shocks than in previous cycles, including amid the ongoing conflict in the Middle East.
However, the agency cautioned that Pakistan’s credit fundamentals remained constrained by a structurally fragile external position, weak debt affordability, a narrow revenue base and limited capacity to attract investment and generate high-productivity economic growth.
The stable outlook reflects a balance between the possibility of faster improvements in Pakistan’s credit fundamentals and the continuing risks posed by these structural vulnerabilities.
The upgrade also applies to the backed foreign-currency senior unsecured ratings of The Pakistan Global Sukuk Programme Co Ltd, whose payment obligations are direct obligations of the government.
Moody’s simultaneously raised Pakistan’s local and foreign-currency country ceilings to B1 and B3, respectively, from B2 and Caa1. The agency attributed the gap between the country ceilings and sovereign rating to the government’s large economic footprint, weak institutions and elevated political and external vulnerability risks.
According to Moody’s, Pakistan’s foreign exchange reserves increased to around $17 billion by the end of July 2026, compared with $14 billion a year earlier, providing coverage for nearly three months of imports.
The country’s External Vulnerability Indicator improved significantly to around 145 percent in 2026, compared with 230 percent in 2025, reflecting the strengthening of foreign exchange reserves relative to external debt maturities.
Moody’s said continued implementation of the IMF-supported reform programme had strengthened policy credibility, maintained macroeconomic stability and supported financing from official creditors.
Pakistan has also gradually regained access to international capital markets, including through a $750 million, three-year Eurobond issued in April 2026 and a debut CNY 1.75 billion, or approximately $250 million, Panda bond issued in May 2026.
These developments have helped Pakistan accumulate reserves while meeting all external obligations during fiscal year 2026.
Moody’s expects Pakistan’s foreign exchange reserves to rise to around $19-20 billion by the end of FY2027 and $20-21 billion by FY2028, provided the government maintains progress under the IMF programme, receives timely disbursements from official partners and retains gradual access to international market financing.
The agency said continued adherence to the IMF programme would help Pakistan meet estimated external financing requirements of approximately $21 billion in FY2027 and $30 billion in FY2028.
Around $7 billion of FY2027 financing requirements and $12 billion of FY2028 requirements are expected to comprise existing bilateral deposits that are likely to be rolled over.
Despite the improvement, Moody’s warned that Pakistan’s external position remained vulnerable to shocks because of its large financing requirements. Nevertheless, the projected accumulation of reserves should provide a stronger buffer against adverse market and commodity-price developments, including higher oil prices resulting from geopolitical tensions.
Pakistan’s debt affordability has also improved substantially. Interest payments accounted for around 35 percent of government revenue in FY2026, down sharply from 49 percent in FY2025.
Moody’s expects this improvement to be sustained, supported by continued macroeconomic stability.
The agency acknowledged that inflation remains sensitive to exchange-rate movements and external shocks, while higher global energy prices could create additional inflationary pressures. However, it said stronger external buffers, a more stable macroeconomic environment and the government’s commitment to fiscal consolidation should help contain these risks and support further improvements in Pakistan’s debt affordability.
Overall, Moody’s said the upgrade reflected a stronger and more resilient credit profile, while stressing that continued reform implementation and sustained improvements in governance, fiscal management and external financing would remain essential for further rating improvements.
Story by Khaleeq Kiani
