Moody’s has upgraded Pakistan’s sovereign credit rating to B3 from Caa1, maintaining a stable outlook and citing improvements in governance, easing external vulnerabilities and stronger fiscal conditions. The US based credit rating agency said the upgrade reflects expectations that improvements in governance will help the government sustain recent gains in Pakistan’s external position while strengthening fiscal metrics. The decision marks a further improvement in Pakistan’s sovereign credit profile as the country continues implementing an IMF supported reform programme and rebuilding its foreign exchange reserves.
Moody’s said Pakistan’s external vulnerability risks have eased since the agency’s previous rating action in August 2025, when the country was rated Caa1. Foreign exchange reserves have increased steadily amid continued macroeconomic stabilization, providing the country with a stronger external buffer. The rating agency noted that reserves reached about $17 billion at the end of July 2026, compared with around $14 billion at the end of July 2025. The latest reserve position is sufficient to cover nearly three months of imports, representing an improvement in Pakistan’s ability to manage external financing pressures.
The improvement in foreign exchange reserves has also contributed to a reduction in Pakistan’s External Vulnerability Indicator, which measures the ratio of short term and long term maturing debt to foreign exchange reserves. Moody’s estimated that the indicator improved to approximately 145 percent in 2026, compared with 230 percent in 2025. The decline indicates that Pakistan’s reserve position has strengthened relative to its external debt obligations, although the rating agency cautioned that the country remains exposed to external shocks because of its still significant financing requirements.
Moody’s also highlighted the role of monetary easing and an improved fiscal position in strengthening Pakistan’s debt affordability. Lower domestic financing costs have contributed to a material improvement in the government’s ability to manage its debt obligations. According to the rating agency, interest payments accounted for around 35 percent of government revenue in fiscal 2026, down substantially from 49 percent in fiscal 2025. Moody’s expects the improvement in debt affordability to continue, supported by sustained macroeconomic stability and the government’s commitment to fiscal consolidation.
The rating agency said continued implementation of the IMF supported reform programme has strengthened policy credibility, supported macroeconomic stabilization and helped maintain financing from official creditors. Pakistan has also gradually regained access to international capital markets, including through a three year $750 million Eurobond issued in April 2026 and a CNY 1.75 billion, equivalent to approximately $250 million, debut Panda bond issued in May 2026. Moody’s said these developments have helped Pakistan accumulate foreign exchange reserves while meeting all of its external obligations during fiscal 2026.
Looking ahead, Moody’s expects Pakistan’s foreign exchange reserves to increase to approximately $19 billion to $20 billion by the end of fiscal 2027 and around $20 billion to $21 billion in fiscal 2028. The projections are dependent on the government maintaining progress under the IMF programme, receiving timely disbursements from official partners and retaining gradual access to international market financing. The agency expects continued adherence to the IMF programme to support Pakistan in meeting its external financing requirements while allowing reserves to build further.
According to Moody’s estimates, Pakistan will face external financing needs of approximately $21 billion in fiscal 2027 and around $30 billion in fiscal 2028. Existing bilateral deposits account for approximately $7 billion of the financing requirement in FY27 and $12 billion in FY28, with these amounts expected to be rolled over. While the projected increase in reserves would provide Pakistan with a larger buffer against external pressures than in previous years, Moody’s cautioned that the country’s external position remains vulnerable because of its large financing requirements.
The rating agency also pointed to Pakistan’s increased resilience against external shocks compared with previous economic cycles. Improved reserves, a more stable macroeconomic environment and stronger policy measures provide additional protection against adverse market and commodity price developments. However, Moody’s noted that elevated oil prices linked to geopolitical tensions could create additional inflationary pressure. The agency expects Pakistan’s strengthened policy framework and improved economic resilience to help contain the impact of such external pressures.
Despite the upgrade, Moody’s stressed that Pakistan’s credit profile continues to face significant structural weaknesses. These include a fragile external position, relatively weak debt affordability despite recent improvements, a narrow revenue base and limitations in attracting investment and generating high productivity economic growth. Weak institutions, political and external vulnerability risks and constraints affecting policy effectiveness also remain important factors behind the country’s B3 rating.
Moody’s maintained a stable outlook, which reflects a balance between the possibility of faster improvement in Pakistan’s credit fundamentals and the continuing risks associated with its structural vulnerabilities. The agency warned that a materialization of these risks could restrict Pakistan’s access to foreign currency financing and reduce fiscal flexibility. The B3 upgrade also applies to the backed foreign currency senior unsecured ratings of The Pakistan Global Sukuk Programme Co Ltd, whose payment obligations are direct obligations of the Government of Pakistan. The outlook for the programme also remains stable.
Alongside the sovereign upgrade, Moody’s raised Pakistan’s local and foreign currency country ceilings to B1 and B3 respectively, from B2 and Caa1. The agency said the two notch gap between the local currency ceiling and the sovereign rating reflects the government’s significant footprint in the economy, weak institutions and elevated political and external vulnerability risks. The difference between the foreign currency and local currency ceilings reflects incomplete capital account convertibility, relatively weak policy effectiveness and potential risks involving transfer and convertibility restrictions.
The rating upgrade comes as Pakistan continues efforts to strengthen its economic position through fiscal consolidation, external sector improvements and reforms under the IMF programme. Moody’s assessment indicates that the country has made measurable progress in rebuilding reserves, reducing debt servicing pressure and improving access to external financing. At the same time, the agency’s continued concerns highlight the importance of maintaining reform momentum and strengthening the structural foundations of the economy to preserve the gains reflected in the improved B3 rating.
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