Moody’s Investors Service has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings from Caa3 to Caa2, reflecting the country’s improving macroeconomic conditions. The global rating agency also adjusted the outlook for Pakistan from stable to positive, citing moderately better government liquidity and external positions, albeit from previously weak levels.
The upgrade comes as Pakistan’s external financing prospects become more secure following a staff-level agreement with the International Monetary Fund (IMF) on a $7 billion, 37-month Extended Fund Facility (EFF) in July 2024. Moody’s anticipates the IMF Board will approve the EFF within the next few weeks, which could further enhance Pakistan’s financial stability.
Despite this positive development, Moody’s cautioned that challenges remain. Pakistan’s foreign exchange reserves have doubled since June 2023 but still fall short of meeting the country’s external financing requirements. The nation remains heavily dependent on timely financial support from its official partners to fulfill its external debt obligations.
Moody’s noted that Pakistan’s Caa2 rating continues to reflect weak debt affordability, with interest payments consuming approximately half of government revenue over the next two to three years. The rating also considers Pakistan’s weak governance and ongoing political uncertainty.
However, the positive outlook suggests that there is potential for improvement if the government can further reduce liquidity and external vulnerabilities. Successful implementation of revenue-raising reforms, supported by the IMF program, could improve Pakistan’s fiscal position and enhance its ability to manage debt.
Looking ahead, Moody’s highlighted that consistent progress in IMF reviews and maintaining strong financial ties with international partners would be crucial for Pakistan. Additionally, final approval of the IMF’s loan program is contingent on securing necessary financing assurances from long-time allies such as Saudi Arabia, the United Arab Emirates, and China.
Moody’s also upgraded the ratings for The Pakistan Global Sukuk Programme Co Ltd and raised the country’s local and foreign currency ceilings to B3 and Caa2, respectively.
Despite these improvements, the agency warned that political and social challenges could threaten the government’s ability to maintain reform momentum, especially after the February 2024 elections. Failure to sustain these reforms could jeopardize continued financial support from international partners.
