Moody’s Upgrades Pakistan’s Credit Outlook to Stable

Pakistan’s credit rating received a boost as Moody’s Ratings upgraded the country’s local and foreign currency issuer ratings from Caa2 to Caa1. The agency also shifted the outlook to “stable,” citing Pakistan’s strengthening external position and reform momentum under the IMF’s Extended Fund Facility (EFF). This rating change, which underscores improving economic resilience, comes after similar positive actions from Fitch Ratings and S&P Global.

Upgrade Details

Moody’s announced that the upgrade applies to both the local and foreign currency issuer ratings, as well as senior unsecured debt. The senior unsecured Medium-Term Note (MTN) programme rating also moved up from (P)Caa2 to (P)Caa1. This marks a significant step forward for Pakistan in terms of international creditworthiness.

The Caa1 rating also extends to the foreign currency senior unsecured debt issued under the Pakistan Global Sukuk Programme Co Ltd. Moody’s treats these as direct obligations of the Government of Pakistan. The outlook for this programme has likewise been revised from “positive” to “stable,” aligning it with the sovereign rating.

Key Drivers Behind the Upgrade

Moody’s attributed the decision to Pakistan’s improving external position, aided by continued access to IMF support and reforms under the EFF programme. The agency pointed to growing foreign exchange reserves as a key factor, though it stressed that Pakistan will still depend on timely financial assistance from global partners.

The fiscal position has also shown signs of recovery, supported by tax base expansion and better revenue mobilization. Debt affordability has improved compared to previous years, though Pakistan remains among the weakest sovereign borrowers on this measure.

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Signs of Economic Recovery

Moody’s noted that Pakistan’s macroeconomic indicators are moving in the right direction. Broader fiscal reforms are beginning to yield results, with reduced deficits and more stable foreign reserves. Investor sentiment has improved following reform commitments and continued engagement with multilateral lenders.

The IMF programme has played a central role in stabilizing the economy, providing both direct financial support and credibility that has encouraged other international lenders to remain engaged.

Balanced Outlook

According to Moody’s, the “stable” outlook indicates a balance between potential improvements and risks. On the upside, Pakistan could see faster-than-expected progress in reducing debt servicing costs and strengthening its external account. If reforms continue at pace and foreign inflows remain steady, external buffers could expand significantly.

However, the agency warned that delays in implementing key structural reforms could reverse progress. Failure to secure timely external financing or address fiscal vulnerabilities could renew pressure on reserves and the exchange rate.

Remaining Challenges

Despite the upgrade, Pakistan faces ongoing governance issues and high political uncertainty. These factors could affect policy continuity and investor confidence. Moody’s stressed that sustained commitment to reform is essential for the country to build on its recent gains.

While debt affordability has improved, it remains fragile. High interest costs and reliance on short-term financing continue to weigh on fiscal flexibility. Moody’s also highlighted that the global economic environment, including interest rate trends and commodity prices, will influence Pakistan’s near-term outlook.

Implications for Investors

The upgrade to Caa1 could improve Pakistan’s access to global capital markets, potentially lowering borrowing costs. It also sends a positive signal to international investors about the country’s reform trajectory and economic stability. However, the stable outlook means significant further improvement will depend on continued fiscal discipline, structural reforms, and stable political conditions.

The fact that multiple rating agencies — Moody’s, Fitch, and S&P — have recently taken positive actions reflects growing international confidence in Pakistan’s direction. If reforms remain on track, further upgrades may be possible over the medium term.