• Revises outlook to stable from positive, citing improved external position, progress on reforms under IMF programme
• Raises local and foreign currency country ceilings

ISLAMABAD: Amid signs of economic recovery, International rating agency Moody’s on Wednesday upgraded Pakistan’s credit rating by one notch to ‘Caa1’ from ‘Caa2’ and revised its outlook to stable from positive, citing an improved external position and progress on reforms under the IMF programme.

The US-based agency, one of the world’s top three, had raised Pakistan’s rating to ‘Caa2’ from ‘Caa3’ in August last year, changing the outlook to positive from stable.

“Foreign exchange reserves are likely to continue to improve, although Pakistan will remain dependent on timely financing from official partners,” Moody’s said.

Meanwhile, the sovereign’s fiscal position is also strengthening from very weak levels, supported by an expanding tax base, it said, adding that debt affordability has improved, but “remains one of the weakest among rated sovereigns. The Caa1 rating also incorporates the country’s weak governance and high political uncertainty”.

The rating agency said the stable outlook reflected balanced risks to Pakistan’s credit profile. On the upside, improvements in the debt service burden and external profile could be more rapid than currently anticipated. On the downside, there remained risks of delays in reform implementation required to secure timely official financing, which would in turn weaken Pakistan’s external position again.

“The upgrade to Caa1 from Caa2 rating also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd”, it said, adding that the associated payment obligations were direct obligations of the government. Concurrently, it changed the outlook for company to stable from positive, mirroring the stable outlook on the government.

Moody’s also raised Pakistan’s local and foreign currency country ceilings to ‘B2’ and ‘Caa1’ from ‘B3’ and ‘Caa2’, respectively. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk. The gap reflects incomplete capital account convertibility and relatively weak policy effectiveness. It also takes into account risks of transfer and convertibility restrictions being imposed.

External position

The agency said Pakistan’s external position has continued to strengthen over the past year and expected further gradual improvements as progress in reform implementation under the IMF programme supports financing from bilateral and multilateral partners. In turn, this contributes to continued increases in the sovereign’s foreign exchange reserves, albeit from still fragile levels.

Pakistan fully met its external debt obligations and boosted its foreign exchange reserves in FY25 (ending June 2025). Reserves stood at $14.3 billion as of July 25, 2025 — equivalent to about 10 weeks of imports — up from $9.4bn at the time of the last rating action in August 2024 and roughly triple the level at end-June 2023.

“Notably, Pakistan successfully completed the first review of the IMF programme on schedule, unlocking a $1bn disbursement from the IMF in May 2025 and then secured a $1bn commercial loan in June 2025, with a $500 million policy-based guarantee by the Asian Development Bank (ADB),” the agency noted.

It expected Pakistan to fully meet its external debt obligations for the next few years, contingent on steady progress on reform implementation and timely completion of IMF reviews.

Pakistan has unlocked new sources of financing with a 28-month arrangement under the IMF Resilience and Sustainability Facility (RSF) worth about $1.4bn and a ten-year country partnership framework with the World Bank for FY26-35, with an indicative financing envelope of $20bn.

Nonetheless, Pakistan’s external position remains fragile, Moody’s warned, adding that foreign exchange reserves remain well below what is required to meet is external debt obligations, underscoring the importance of steady progress with the IMF programme to continually unlock financing. Pakistan’s external financing needs are about $24-25bn in FY26, and similar amounts again in FY27, it said.

Published in Dawn, August 14th, 2025