• Country regains ‘B3 plus stable outlook’ after six years
• Improvement comes on back of higher forex reserves, debt affordability, return to market financing
• Structurally fragile external position, narrow revenue base means recovery still hinges on staying IMF-laid course
ISLAMABAD: Global ratings agency Moody’s on Monday upgraded Pakistan’s sovereign credit rating to B3 from Caa1 and maintained a stable outlook, citing expectations of improvements in governance and easing external and fiscal vulnerabilities.
“The upgrade to B3 reflects our expectations that improvements in governance will allow the government to sustain the recent improvements in the country’s external position and strengthen fiscal metrics,” Moody’s said in an announcement.
Pakistan has regained the B3 plus stable outlook after six years; the last time it held this rating was August 2020.
The country’s external vulnerability risks have eased further since the last rating of Caa1 in August 2025, with foreign exchange reserves building steadily, supported by sustained macroeconomic stabilisation, it said.
At the same time, lower domestic financing costs amid monetary easing and an improved fiscal position have driven a material improvement in Pakistan’s debt affordability, the US-based rating firm stated, adding that Pakistan’s strengthening credit profile is also demonstrating greater resilience to external shocks than in previous cycles, including the ongoing Middle East conflict.
However, Moody’s warned that notwithstanding these improvements, 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.
The stable outlook balances 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.
The upgrade to B3 from Caa1 also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, the agency said.
The associated payment obligations are direct obligations of the Pakistan’s government. The outlook for Pakistan Global Sukuk Programme Co Ltd remains stable, it said.
Concurrent to the Monday action, Moody’s also raised Pakistan’s local and foreign currency country ceilings to B1 and B3 from B2 and Caa1, 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 two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness. It also takes into account risks of transfer and convertibility restrictions being imposed.
The rating agency noted that foreign exchange reserves increased to about $17 billion at end-July 2026, from $14bn in end-July 2025, sufficient to cover nearly three months of imports. As such, Pakistan’s External Vulnerability Indicator (the ratio of short-term and long-term maturing debt to foreign exchange reserves) has improved to about 145 per cent in 2026, compared to 230pc in 2025.
Continued implementation of the IMF-supported reform programme has strengthened policy credibility, maintained macroeconomic stabilisation and underpinned financing from official creditors. Pakistan has also regained gradual access to market financing, including a three-year, $750 million Eurobond issued in April 2026 and a CNY 1.75bn (about $250m) debut Panda bond in May 2026. Together, these developments have enabled an accumulation of reserves while allowing Pakistan to meet all of its external obligations in FY26.
Moody’s expected foreign exchange reserves to rise to about $19-20bn at the end of fiscal 2027 and $20-21bn in FY28, subject to the government’s sustained progress on the IMF programme, enabling timely disbursements from official partners and continued gradual access to market financing.
In turn, continued adherence to the International Monetary Fund (IMF) programme would allow Pakistan to meet its external financing needs of about $21bn in fiscal 2027 and around $30bn in fiscal 2028, according to IMF estimates, while supporting continued reserves accumulation. About $7bn and $12bn of financing requirements in FY27 and FY28, respectively, comprise existing bilateral deposits, expected to be rolled over.
Yet, Pakistan’s external position remains vulnerable to shocks, particularly given still-large external financing requirements, it noted. However, the projected reserve accumulation provides a larger buffer than in recent years against adverse market or commodity-price developments, including the elevated oil prices associated with the ongoing Middle East conflict, the statement said.
Pakistan’s debt affordability has also improved materially, from very weak levels. Interest payments absorbed about 35pc of government revenue in fiscal 2026, down sharply from 49pc in fiscal 2025. The rating agency expected the recent improvement in Pakistan’s debt affordability to be durable, underpinned by sustained macroeconomic stability.
While inflation remains sensitive to exchange-rate movements and external shocks, improved external buffers, a more stable macroeconomic environment and the authorities’ commitment to fiscal consolidation should help contain inflationary pressures and support debt affordability gains. Although higher global energy prices stemming from geopolitical tensions pose upside risks to inflation, Moody’s expected Pakistan’s strengthened policy framework and improved economic resilience to mitigate their impact.
Published in Dawn, August 25th, 2026
