Forex company's unsecured debt ratings boosted to 'Caa1' by Moody's at local level
Pakistan's Fiscal Position Improves, but External Position Remains Fragile
After Moody's recent upgrade of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2, the country's external position has strengthened but remains fragile, and its fiscal position is improving from very weak levels.
Moody's highlighted that Pakistan's external position has improved over the past year due to IMF-led reforms, increased foreign financing, and higher foreign exchange reserves. The government's successful completion of the first review of the IMF program on schedule, unlocking a $1 billion disbursement from the IMF in May 2025, has been a significant factor in this improvement. Moody's also noted the impact of a 28-month IMF Resilience and Sustainability Facility (~$1.4 billion) and significant World Bank financing commitments totaling $20 billion for 2026-2035.
However, reserves remain well below what is needed to cover external obligations, with estimated external financing needs of $24-25 billion in FY2026 and similar in FY2027. Any delays in reforms or withdrawal of financing could cause deterioration again in the external position.
Regarding fiscal position, Moody's noted that the government's fiscal health is strengthening thanks to an expanding tax base, although debt affordability remains among the weakest globally. Tax revenues have risen by about 2 percentage points of GDP, due to a combination of better enforcement and new tax measures. The fiscal improvements contribute to the rating upgrade but are still fragile with downside risks if reform implementation falters.
Government interest payments are expected to absorb about 40-45% of revenue in 2026-2027, a significant decline from about 60% in fiscal year 2024, but still high internationally and a key credit constraint. Pakistan will remain dependent on timely financing from official partners.
Despite these improvements, Pakistan still faces significant external repayments (~$11 billion in the current year) and structural challenges beyond credit ratings. Public debt stands very high, with around $87.4 billion in external borrowing. The economy faces contraction in manufacturing, high unemployment (~22%), elevated inflation, and poverty impacting fiscal sustainability. National priorities like defense spending remain substantial, partly funded by foreign assistance, potentially limiting economic development investments.
In summary, Moody’s upgrade signals improved external buffers and fiscal strengthening under IMF-supported reforms, but Pakistan’s external and fiscal positions still face substantial fragility and uncertainties linked to political, institutional, and structural economic challenges. Continued reform implementation and external financing are critical to sustain gains.
[1] Pakistan's External Financing Needs Estimated at $24-25 Billion in FY2026
[2] Moody's Upgrades Pakistan's Local and Foreign Currency Ratings
[3] Pakistan's External Position Improves, but Remains Fragile
[4] Pakistan's Fiscal Position Improves, but Debt Affordability Remains Weak
[5] Pakistan's Structural Challenges Beyond Credit Ratings
[6] The high interest payments on debt, absorbing about 40-45% of revenue in 2026-2027, are a key credit constraint for Pakistan's business and finance sector.
[7] The success of Pakistan's business and finance depends heavily on the continued implementation of reforms, as any delays or withdrawals of financing could lead to a deterioration in the external position.
[8] Increased dividends will be challenging due to the high debt levels and potential future interest payments, making liquidity a significant concern for Pakistani businesses.
[9] Despite the improved fiscal position, the risk of default remains high for defi or credit markets due to Pakistan's substantial external debt and the fragile nature of its external and fiscal positions.
[10] The government's capital expenditure is likely to be impacted by the need to repay a significant amount of public debt, potentially limiting investments in critical infrastructure and economic development.
[11] Pakistan's external position may benefit from exploring new sources of financing, such as decentralized finance (defi), to supplement traditional financing channels and provide additional liquidity.
