Moody’s Ratings (Moody’s) on Wednesday upgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2.
The global rating agency also upgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)Caa2.
“Concurrently, we changed the outlook for the Government of Pakistan to stable from positive,” it said.
“The upgrade to Caa1 reflects Pakistan’s improving external position, supported by its progress in reform implementation under the International Monetary Fund (IMF) Extended Fund Facility (EFF) program,” it said.
The development comes days after Fitch Ratings and S&P Global upgraded Pakistan’s credit ratings.
In its statement, Moody’s said that Pakistan’s foreign exchange reserves are likely to continue to improve, although the country will remain dependent on timely financing from official partners.
“Meanwhile, the sovereign’s fiscal position is also strengthening from very weak levels, supported by an expanding tax base. Its 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,” it said.
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Meanwhile, the stable outlook reflects balanced risks to Pakistan’s credit profile, it said.
“On the upside, improvements in the debt service burden and external profile could be more rapid than we currently expect. On the downside, there remains risks of delays in reform implementation required to secure timely official financing, which would in turn weaken Pakistan’s external position again,” Moody’s said.
Moreover, 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.
“The associated payment obligations are, in our view, direct obligations of the Government of Pakistan. Concurrently, we changed the outlook for The Pakistan Global Sukuk Programme Co Ltd to stable from positive, mirroring the stable outlook on the Government of Pakistan,” the credit rating agency said.
External position continues to strengthen, although still fragile
Moody’s noted that Pakistan’s external position has continued to strengthen over the past year.
“We expect further gradual improvements as progress in reform implementation under the IMF program 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,” it said.
The rating agency pointed out that Pakistan fully met its external debt obligations and added to its foreign exchange reserves in FY2025 (ending June 2025).
“We expect 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,” Moody’s said.
The US-based rating agency stated that Pakistan has unlocked new sources of financing with a 28-month arrangement under the IMF Resilience and Sustainability Facility (RSF) worth about $1.4 billion and a ten-year country partnership framework with the World Bank for FY2026-2035, with an indicative financing envelope of $20 billion.
“Nonetheless, Pakistan’s external position remains fragile. Its 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.
“We estimate Pakistan’s external financing needs are about $24-25 billion in FY2026, and similar amounts again in FY2027,” read the statement.
Fiscal position improving, but debt affordability remains weak
Moody’s said that Pakistan’s fiscal position has improved from very weak levels, reflecting progress in implementing revenue-raising measures. “The budget deficits are narrowing and primary surpluses are widening. The government debt affordability is also improving, although it remains one of the weakest among our rated sovereigns.”
Moody’s acknowledged that the government has strengthened its revenue collection through a combination of better enforcement and new tax measures.
“Government revenues rose to about 16% of GDP in FY2025 from 12.6% in FY2024, led by a large increase in tax revenues, amounting to about 2 percentage points of GDP.
“The government’s non-tax revenues also rose sharply due to a one-off extraordinary dividend from the State Bank of Pakistan (SBP), the central bank,” it said.
“We expect the government to continue enhancing revenue administration and compliance, alongside the introduction of new tax measures…. We estimate tax revenues to pick up by another 0.5 percentage points of GDP in FY2026. However, a decline in SBP dividends will lead to an overall narrowing of government revenue to about 15-15.5% of GDP.
Meanwhile, Moody’s expects government expenditure to remain contained, even as budgeted defence spending has increased.
“Overall, we expect the fiscal deficit to narrow further to 4.5-5% of GDP in FY2026 (FY2025: 5.4%).
At the same time, we expect government interest payments to absorb about 40-45% of revenue in FY2026-2027, which is a marked decline from about 60% in FY2024, but remains very high internationally and a key credit constraint,“ Moody’s said.
Risks to ratings
Moody’s warned that there remains risks of slippage in reform implementation or results, leading to delays in or withdrawal of financing support from official partners.
“This could in turn lead to renewed material deterioration in the sovereign’s external position,” it said.
Moody’s noted that several previous IMF programs were not completed, in part reflecting weak governance and institutional strength, compounded by a challenging domestic political environment.
“The current government formed after the February 2024 elections faces a significant challenge to continually implement revenue-raising measures without triggering social tensions,” it said.
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