ISLAMABAD: Moody’s Ratings (Moody’s) has upgraded Pakistan’s sovereign credit rating to B3 from Caa1, a four-year high, citing improved governance, stronger external buffers and sustained macroeconomic stabilisation, while retaining a stable outlook.
The rating agency stated the upgrade to B3 reflects its expectations that improvements in governance will allow the government to sustain the recent improvements in the country’s external position and strengthen fiscal metrics.
Pakistan’s external vulnerability risks have eased further since its last rating action in August 2025, with foreign exchange reserves building steadily, supported by sustained macroeconomic stabilisation.
READ MORE: Moody’s upgrades Pakistan’s ratings to Caa1, changes outlook to stable
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. Pakistan’s strengthening credit profile is also demonstrating greater resilience to external shocks than in previous cycles, including the ongoing Middle East conflict.
Notwithstanding these improvements, Pakistan’s credit profile remains 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 economic growth.
These credit constraints are embedded in the B3 rating.
Moody’s stated that 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 associated payment obligations are, in our view, direct obligations of the Government of Pakistan. The outlook for The Pakistan Global Sukuk Programme Co Ltd remains stable.
“Concurrent with today’s action, we have 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,” Moody’s added.
The ratings agency stated that foreign exchange reserves increased to about USD17 billion at the end of July 2026, from USD14 billion at the end of July 2025, sufficient to cover nearly three months of imports.
“Our estimate of Pakistan’s External Vulnerability Indicator (the ratio of short-term and long-term maturing debt to foreign exchange reserves) has improved to about 145 percent in 2026, compared to 230 percent 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, USD750 million Eurobond issued in April 2026 and a CNY 1.75 billion (about USD250 million) 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 fiscal 2026”, it added.
Moody’s further stated that it expects foreign exchange reserves to rise to about USD19–20 billion at the end of fiscal 2027 (July 2026 to June 2027) and USD20–21 billion in fiscal 2028. These projections assume that the government will sustain progress on the IMF programme, enabling timely disbursements from official partners and continued gradual access to market financing.
In turn, continued adherence to the IMF programme would allow Pakistan to meet its external financing needs of about USD21 billion in fiscal 2027 and around USD30 billion in fiscal 2028, according to IMF estimates, while supporting continued reserves accumulation. About USD7 billion and USD12 billion of financing requirements in FY2027 and FY2028, respectively, comprise existing bilateral deposits, which we expect to be rolled over, it added.
Pakistan’s external position remains vulnerable to shocks, particularly given still-large external financing requirements. 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.
Higher reserves, stable exchange rates and lower inflation collectively increase Pakistan’s capacity to absorb such shocks relative to prior cycles, Moody’s added.
It further noted that Pakistan’s debt affordability has also improved materially, from very weak levels. Interest payments absorbed about 35 percent of government revenue in fiscal 2026, down sharply from 49 percent in fiscal 2025. The improvement primarily reflects a significant reduction in domestic interest rates following a sharp decline in inflation.
The earlier disinflation allowed the central bank to cut the policy rate significantly. Although policy rates were subsequently raised modestly as inflation rebounded, they remained at a relatively low 11.5 percent in July 2026 (from a peak of 22 percent between June 2023 and May 2024), helping to contain the government’s borrowing costs on domestic debt, which accounts for about two-thirds of total government debt.
“We expect the recent improvement in Pakistan’s debt affordability to be durable, underpinned by sustained macroeconomic stability. We project Pakistan’s debt affordability to remain broadly stable at about 35 percent for the next one to two years, still a weak level but a more manageable one. Thereafter, we expect debt affordability to improve gradually as fiscal consolidation reduces the government’s debt burden and interest expenditure,” it added.
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, we expect Pakistan’s strengthened policy framework and improved economic resilience to mitigate their impact, it added.
Notwithstanding the improvement to Pakistan’s debt affordability, it remains weak and an important constraint on Pakistan’s rating. The high share of government revenue absorbed by interest payments will limit fiscal flexibility and the government’s capacity to address essential social spending and infrastructure needs.
The rating is also constrained by factors limiting the attractiveness of Pakistan as a place to invest, including some unpredictability in policies and regulations and ongoing domestic and geopolitical risk. In part related to this, Pakistan’s access to both non-debt and debt financing is more limited than typical of higher-rated sovereigns, Moody’s added.
The stable outlook balances a potentially faster improvement in Pakistan’s credit fundamentals against outstanding risks related to the sovereign’s vulnerabilities, which, if materialised, could weaken access to foreign-currency financing and further reduce fiscal flexibility.
As mentioned, Pakistan’s external position remains structurally fragile, reflecting a small export base, very low foreign direct investment (FDI) inflows, high dependence on remittances, and reliance on official and commercial financing to meet its external financing needs.
Weak FDI inflows also underscore longstanding challenges in attracting investment, constraining productivity gains, export diversification, and the economy’s growth potential. These vulnerabilities leave Pakistan exposed to shifts in external financing conditions, weaker remittance inflows, or reduced investor confidence, which could increase external financing pressures.
Pakistan’s debt affordability remains weak, reflecting a still-narrow revenue base and high interest burden. While we expect the government to continue improving revenue collection through administrative measures and reform efforts, progress is likely to be gradual. Adverse economic shocks or a material deterioration in financing conditions could place renewed pressure on government finances and lead to a significant weakening in debt affordability.
Pakistan’s CIS-5 credit impact score reflects its very high exposure to social and environmental risks, as well as its weak governance profile. Weak governance and institutions and very weak fiscal strength constrain the government’s capacity to address environmental and social risks, it added.
Pakistan has a G-4 issuer profile score for governance risk. International surveys of various indicators of governance, while showing some early signs of improvement, continue to point to weak rule of law and control of corruption, as well as limited government effectiveness. Fiscal policy effectiveness is low, although it has improved somewhat, resulting in a persistently narrow revenue base that constrains the government’s capacity to address the country’s needs. Still, measures are being taken to address the issue.
On 20 August 2026, a rating committee was called to discuss the rating of the Government of Pakistan. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has materially increased. The issuer’s susceptibility to event risks has not materially changed.
The ratings would likely be upgraded if Pakistan’s external position and debt affordability were to improve materially beyond our current expectations, reflecting stronger policy effectiveness and a sustained track record of reform implementation. A further rebuilding of foreign exchange reserves and continued improvement in access to official and commercial financing would further reduce external vulnerability risks. Continued fiscal consolidation, including through implementing revenue-raising measures, pointing to a meaningful improvement in debt affordability beyond our current expectations, would also be credit positive.
The ratings would likely be downgraded if there were evidence of renewed material increases in government liquidity or external vulnerability risks. This could come from financing strains due to delays in or withdrawal of support from multilateral and bilateral partners, leading to a rapid and significant decline in the foreign exchange reserves. An increase in social and political risks that disrupted policymaking and undermined Pakistan’s ability to secure financing would also be credit negative.
We set Pakistan’s fiscal strength score at “caa2”, above the initial score of “caa3”, to reflect its improving debt affordability that we expect to be sustained. This leads to a final scorecard-indicated outcome of B2-Caa1, compared to an initial scorecard-indicated outcome of B3-Caa2. The assigned rating is within the final scorecard-indicated outcome range.
Copyright Business Recorder, 2026
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