KARACHI: Global rating agency Moody’s has upgraded Pakistan’s banking outlook to positive from stable on the back of improved financial performance.

“We have changed our outlook on Pakistan’s banking system to positive from stable to reflect the banks’ resilient financial performance as well as improving macroeconomic conditions from very weak levels a year ago,” said the statement issued by the rating agency.

Financial sector experts say the banks have generated substantial profits over the past couple of years despite a lack of engagement in using their money for economic growth. Lending to the private sector has been dismal. However, the government’s aggressive borrowings at an unprecedented 22 per cent and even higher throughout FY24 have significantly enriched the banks.

All top rating agencies had downgraded Pakistan’s economic outlook in 2023, which blocked the country from reaching the international market for launching Eurobonds to raise dollars. The major hurdle is still there for the country. Finance Minister Mohammad Aurangzeb met the top agencies in Washington a few months back to brief them on developments in Pakistan.

Terms long-term debt sustainability, weak fiscal position ‘key risks’ for Pakistan

Moody’s said that Pakistan’s long-term debt sustainability remains a key risk, with its still very weak fiscal position, high liquidity, and external vulnerability risks.

However, the rating agency said that Pakistan’s economy would expand by 3pc in FY25, compared with 2.5pc in FY24 and -0.2pc in FY23. The State Bank of Pakistan recently projected GDP growth of 2.5 to 3.5pc.

“We forecast GDP growth of 3pc in 2025 and 4pc in 2026, up from 2.5pc in 2024, further driven by a 1,000 basis points cut in interest rates since the start of the monetary policy easing cycle in June 2024,” said Moody’s.

“Inflation is also significantly easing, which we estimated at around 8pc for 2025 from an average of 23pc in 2024,” said Moody’s statement.

It further said the positive outlook on the sector also mirrors the Government of Pakistan’s (Caa2 positive) positive outlook, with Pakistani banks having significant exposure to the sovereign through their large holdings of government securities, which account for around half of total banking assets.

“Banks will maintain adequate capital buffers, supported by subdued loan growth and solid cash generation, despite dividend payouts remaining high.”

As of September 2024, government securities accounted for 55pc of banks’ total assets. This significant exposure links banks’ credit strength to that of the sovereign, which is improving from very weak levels, said the statement.Although problem loans have deteriorated to 8.4pc of total loans as of September 2024 from 7.6pc in the prior year, overall loans account for only 23pc of banks’ total assets, it said.

Published in Dawn, March 13th, 2025