Moody's upgrades Pakistan's credit rating to B3 from Caa1

Moody’s Ratings upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to B3 from Caa1 on Monday, citing improvements in governance, stronger foreign exchange reserves, lower domestic borrowing costs and sustained macroeconomic stabilization.

The ratings agency maintained a stable outlook for Pakistan, saying the upgrade reflects expectations that improvements in governance will help the government preserve gains in the country’s external position while strengthening fiscal metrics.

Moody’s also upgraded Pakistan’s senior unsecured medium-term note program rating to (P)B3 from (P)Caa1. The upgrade applies as well to the backed foreign-currency senior unsecured ratings of The Pakistan Global Sukuk Programme Co. Ltd., whose payment obligations Moody’s considers direct obligations of the Pakistani government.

The agency said Pakistan’s external vulnerability risks have eased further since its previous rating action in August 2025. Foreign exchange reserves have increased steadily, while macroeconomic stabilization and progress under the International Monetary Fund-supported reform program have strengthened policy credibility.

“Pakistan’s strengthening credit profile is also demonstrating greater resilience to external shocks than in previous cycles,” Moody’s said, including amid the ongoing Middle East conflict.

However, the agency cautioned that Pakistan’s credit profile remains vulnerable because of a structurally fragile external position, weak debt affordability, a relatively narrow revenue base and constraints on attracting investment and generating high-productivity economic growth.

Stronger foreign exchange position

Pakistan’s foreign exchange reserves rose to about USD 17 billion at the end of July 2026, compared with USD 14 billion a year earlier, Moody’s said. The reserves are equivalent to nearly three months of imports.

The agency’s External Vulnerability Indicator, which measures short- and long-term debt maturities against foreign exchange reserves, improved to about 145% in 2026 from 230% in 2025.

Moody’s attributed the improvement to continued implementation of the IMF-supported reform program, which has helped maintain macroeconomic stability and secure financing from official creditors.

Pakistan has also regained gradual access to international capital markets. The country issued a three-year USD 750 million Eurobond in April and a CNY 1.75 billion, or about USD 250 million, Panda bond in May.

These developments have allowed Pakistan to build reserves while meeting all external obligations during fiscal 2026.
Moody’s expects foreign exchange reserves to rise to about USD 19 billion-USD 20 billion by the end of fiscal 2027 and USD 20 billion-USD 21 billion in fiscal 2028.

The projections assume continued progress under the IMF program, timely disbursements from official partners and further gradual access to market financing.

Pakistan is expected to face external financing requirements of about USD 21 billion in fiscal 2027 and around USD 30 billion in fiscal 2028, based on IMF estimates. About USD 7 billion of the FY2027 requirement and USD 12 billion of the FY2028 requirement consist of existing bilateral deposits that Moody’s expects to be rolled over.

The agency said the higher reserve buffer should provide greater protection against external shocks, including elevated oil prices linked to geopolitical tensions.

Debt affordability improves

Moody’s also highlighted a significant improvement in Pakistan’s debt affordability.

Interest payments accounted for about 35% of government revenue in fiscal 2026, down sharply from 49% in fiscal 2025. The improvement primarily reflected lower domestic interest rates following a sharp decline in inflation.

The State Bank of Pakistan reduced its policy rate substantially after inflation eased. Although rates were subsequently raised modestly as inflation rebounded, the policy rate remained at 11.5% in July 2026, compared with a peak of 22% between June 2023 and May 2024.

Lower borrowing costs have helped contain interest expenses on domestic debt, which accounts for about two-thirds of Pakistan’s total government debt.

Moody’s expects debt affordability to remain broadly stable at about 35% of government revenue over the next one to two years. While the level remains weak compared with higher-rated sovereigns, the agency expects gradual improvement thereafter as fiscal consolidation reduces the government’s debt burden and interest costs.

Still, Moody’s said the high share of revenue consumed by interest payments will continue to restrict fiscal flexibility and the government’s ability to expand essential social spending and infrastructure investment.

Stable outlook reflects risks

The stable outlook reflects a balance between the possibility of faster improvements in Pakistan’s credit fundamentals and continuing risks to the country’s external and fiscal position.

Moody’s said Pakistan remains vulnerable because of its small export base, low foreign direct investment inflows, heavy reliance on remittances and dependence on official and commercial financing.

Weak FDI inflows also limit productivity gains, export diversification and long-term economic growth, the agency said.

A deterioration in external financing conditions, weaker remittances or declining investor confidence could increase pressure on Pakistan’s external accounts and reduce access to foreign-currency financing.

The agency also warned that Pakistan’s narrow revenue base and high interest burden remain significant constraints. Although reforms and administrative measures are expected to improve revenue collection, progress is likely to be gradual.

Adverse economic shocks or a significant deterioration in financing conditions could therefore renew pressure on government finances.

Country ceilings raised

Alongside the sovereign upgrade, Moody’s raised Pakistan’s local- and foreign-currency country ceilings to B1 and B3, respectively, from B2 and Caa1.

The agency said the two-notch gap between the local-currency ceiling and sovereign rating reflects the government’s large footprint in the economy, weak institutions and high political and external vulnerability.

The gap between the foreign-currency ceiling and local-currency ceiling reflects incomplete capital-account convertibility, relatively weak policy effectiveness and the risk of transfer and convertibility restrictions.

Despite the upgrade, Moody’s maintained its assessment of significant environmental, social and governance risks facing Pakistan.

The agency cited Pakistan’s vulnerability to climate change, water shortages, floods, droughts and extreme temperatures. It also highlighted low incomes and limited access to health care, education, housing and basic services.

Moody’s said weak governance and institutions, along with very weak fiscal strength, continue to constrain the government’s ability to address environmental and social challenges.

The B3 rating therefore, reflects both Pakistan’s recent progress in stabilization and its remaining structural vulnerabilities.