Rating of Pakistan increased to Caa1 by Moody's, with a modified outlook now deemed stable.
The Government of Pakistan has secured a 28-month arrangement under the International Monetary Fund (IMF) Resilience and Sustainability Facility (RSF) worth about $1.4 billion. This news comes as part of a series of positive developments that have led to improvements in Pakistan's credit ratings.
Moody's Ratings recently upgraded the Government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2. The senior unsecured MTN programme rating was also upgraded to (P)Caa1 from (P)Caa2. The Caa1 rating incorporates the country's weak governance and high political uncertainty.
The key factors contributing to the improvement in Pakistan's credit ratings are macroeconomic stabilization driven by IMF-backed reforms, increased foreign exchange reserves, fiscal consolidation, and improved external financial position.
The 37-month IMF Extended Fund Facility (EFF) program approved in September 2024 has been pivotal, providing crucial financial support and enforcing fiscal discipline and structural reforms, including tax reforms and better debt servicing. As a result, government revenues rose to about 16% of GDP in FY2025 from 12.6% in FY2024, led by a large increase in tax revenues.
Foreign reserves increased from about $9.4 billion in August 2024 to over $14 billion by mid-2025 and $20.5 billion in later estimates, bolstering the external position and reducing liquidity risk. Inflation was reduced dramatically from a peak of 38% in May 2023 to around 3.2% by June 2025, accompanied by monetary policy easing with policy rates cut from 22% to 11%, which supported economic stability and growth.
The fiscal deficit narrowed substantially, reflecting better revenue collection and expenditure control, although challenges like low tax-to-GDP ratios and debt servicing costs persist. The stable outlook reflects balanced risks to Pakistan's credit profile.
The World Bank has approved a ten-year country partnership framework with Pakistan for FY2026-2035, with an indicative financing envelope of $20 billion. Overall, Moody's expects the fiscal deficit to narrow further to 4.5-5% of GDP in FY2026.
Despite these improvements, rating agencies note that Pakistan’s external position remains somewhat fragile, heavily reliant on continued IMF support and reform implementation. The government's interest payments are expected 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 warned that there remains risks of slippage in reform implementation or results, leading to delays in or withdrawal of financing support from official partners, which could in turn lead to renewed material deterioration in the sovereign's external position. The sovereign's fiscal position is strengthening from very weak levels, supported by an expanding tax base, but the government debt affordability remains one of the weakest among Moody's rated sovereigns.
Pakistan's budget deficits are narrowing and primary surpluses are widening. The upgrade also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd. The upgrade reflects Pakistan's improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility (EFF) program.
In summary, the improved credit ratings are grounded in macroeconomic stabilization through IMF support, external balance strengthening via higher reserves, fiscal discipline, inflation control, and positive growth outlook, which together have reduced default risk and improved investor confidence. These developments are a positive sign for Pakistan's economic future and may encourage further investment in the country.
References:
- https://www.imf.org/en/News/Articles/2024/09/30/pr24344-pakistan-executes-imf-extended-arrangement-under-the-rsf
- https://www.reuters.com/business/pakistan-secures-imf-support-1-4-billion-2025-07-01/
- https://www.dawn.com/news/1678799
- https://www.moodys.com/research/Moodys-upgrades-Pakistans-outlook-to-stable-from-positive--PR-1223389
- https://www.thenews.com.pk/latest/1284978-moodys-upgrades-pakistans-sovereign-rating-to-caa1-from-caa2
- The Government of Pakistan's improved credit ratings by Moody's are due in part to the successful execution of the IMF Extended Fund Facility (EFF) program, which has provided financial support and enforced fiscal discipline.
- The upgraded ratings incorporate the country's weak governance and high political uncertainty, yet the improvements in Pakistan's credit position include macroeconomic stabilization, increased foreign exchange reserves, and fiscal consolidation.
- As a result of these positive developments, the World Bank has approved a ten-year country partnership framework with an indicative financing envelope of $20 billion.
- The key challenge going forward is the government's high interest payments, which are expected to absorb about 40-45% of revenue in FY2026-2027, despite a marked decline from previous years.
- Moody's expects the fiscal deficit to narrow further to 4.5-5% of GDP in FY2026, but notes that the government's debt affordability remains one of the weakest among Moody's rated sovereigns.
- The improved credit ratings, driven by macroeconomic stabilization and external balance strengthening, have reduced default risk and improved investor confidence, signaling a positive sign for increased investment in Pakistan's business and finance sectors, including dividends from investments in DeFi projects.
