ISLAMABAD:
Ahead of the government’s plans to venture into western markets to raise billions of dollars, Moody’s on Monday upgraded Pakistan’s rating to B3 but said international surveys continued to point to weak rule of law and control of corruption and limited government effectiveness.
In its rating upgrade, one of the leading international credit rating agencies said the nation’s debt profile remained weak due to a “fragile” external position and constraints on growth and investment.
Prime Minister Shehbaz Sharif congratulated the nation for the rating upgrade; however, the one-notch elevation will not materially change Pakistan’s credit risk. The agency has given a highly speculative rating of B3, which is seven notches below investment grade. Moody’s upgraded Pakistan’s rating from Caa1.
“We have upgraded the rating for the senior unsecured programme to B3 from Caa1 and maintained the outlook for the government of Pakistan at stable,” it said. The upgrade reflected expectations that improvements in governance would allow the government to sustain the recent improvements in the country’s external position and strengthen fiscal metrics, it added.
Moody’s commented that “international surveys of various indicators of governance, while showing some early signs of improvement, continue to point to weak rule of law and control of corruption as well as limited government effectiveness”. It further said that fiscal policy effectiveness was low, although it improved somewhat, resulting in a persistently narrow revenue base that constrained the government’s capacity to address the country’s needs, although measures were being taken to address the issue.
The Express Tribune reported last week that the government could complete only four out of 19 Economic Governance System improvement actions for the June-end period, determined by the International Monetary Fund (IMF).
The rating agency said that Pakistan’s credit profile remained vulnerable due to a structurally fragile external position, weak debt affordability, a still relatively narrow revenue base and constraints on attracting investment and stimulating high-productivity and economic growth. “These credit constraints are embedded in the B3 rating,” it added.
While justifying its comments about the weak external position, Moody’s said Pakistan’s external position remained structurally fragile, reflecting a small export base, very low foreign direct investment (FDI) inflows, high dependence on remittances, and reliance on official and commercial financing to meet its external financing needs.
It added that weak FDI inflows also underscored longstanding challenges in attracting investment, constraining productivity gains, export diversification and the economy’s growth potential. These vulnerabilities left Pakistan exposed to shifts in external financing conditions, weaker remittance inflows or reduced investor confidence, which could increase external financing pressures, the agency said.
Finance Minister Muhammad Aurangzeb said last Wednesday that the country was planning to tap global debt markets by issuing long-term papers for five, seven and 10 years. However, he has not yet appointed a permanent director general debt – a position lying vacant since January this year. Its acting charge is given to an additional secretary budget, which ends the purpose of having an independent debt management office.
Moody’s said Pakistan’s external vulnerability risks had eased further since its last rating action in August 2025, with foreign exchange reserves building steadily, supported by sustained macroeconomic stabilisation. At the same time, lower domestic financing costs amid monetary easing and an improved fiscal position have driven a material improvement to Pakistan’s debt affordability.
But it said the foreign exchange reserves would improve to only $20 billion by the end of the current fiscal year, which was at least $1 billion lower than the understanding reached with the IMF. Forex projections for June 2028 are $20-21 billion – close to this fiscal year’s target.
Moody’s said that continued adherence to the IMF programme would allow Pakistan to meet its external financing needs of about $21 billion in fiscal 2027 and around $30 billion in fiscal 2028, according to the IMF’s estimates, while supporting continued reserves accumulation.
About $7 billion and $12 billion of financing requirements in FY2027 and FY2028, respectively, comprised existing bilateral deposits, which “we expect to be rolled over”, it added. Moody’s said the stable outlook balanced a potentially faster improvement in Pakistan’s credit fundamentals against outstanding risks related to the vulnerabilities above, which, if materialised, could weaken access to foreign currency financing and further reduce fiscal flexibility.
It also raised Pakistan’s local and foreign currency country ceilings to B1 and B3 but explained that the two-notch gap between the local currency ceiling and sovereign rating was driven by the government’s relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk.
The two-notch gap reflects incomplete capital account convertibility and relatively weak policy effectiveness. It also takes into account risks of transfer and convertibility restrictions being imposed.
It acknowledged that Pakistan’s external vulnerability indicator had improved to about 145% in 2026, compared to 230% in 2025. Pakistan’s debt affordability has also improved materially, from very weak levels. Interest payments absorbed about 35% of government revenue in fiscal 2026, down sharply from 49% in fiscal 2025. The improvement primarily reflects a significant reduction in domestic interest rates following a sharp decline in inflation. The earlier disinflation allowed the central bank to cut the policy rate significantly.
But it warned that despite improvement in Pakistan’s debt affordability, it remained weak and an important constraint on the country’s rating. The high share of government revenue absorbed by interest payments would limit fiscal flexibility and the government’s capacity to address essential social spending and infrastructure needs, it said.
