Global ratings improve for Pakistan's economy with political stability

KARACHI: Pakistan’s economy is showing signs of recovery as the country begins to stabilize politically. In a significant boost to its economic standing, Moody’s has upgraded Pakistan’s credit rating from Caa3 to Caa2, following a similar upgrade by Fitch last month.

The outlook has also been revised from stable to positive, reflecting growing global confidence in Pakistan’s path to economic stability.

Following Fitch’s upgrade last month, Moody’s has followed suit by elevating Pakistan’s credit rating from Caa3 to Caa2. In addition to this upgrade, Moody’s has also adjusted the outlook to positive from stable.

Moody’s recent upgrade of Pakistan’s credit rating and outlook is “far more than a mere notch higher on a rating scale” said Head of Research Arif Habib Limited Tahir Abbas. It reflects a growing global confidence in Pakistan’s capacity to navigate its financial challenges and lay the foundation for sustainable economic growth. This development offers the economy crucial breathing space, enabling the government to concentrate on implementing longer-term reforms.

With this latest upgrade, Pakistan is now better positioned to access international capital markets on more favourable terms. The potential issuance of Eurobonds and Panda bonds at competitive rates could significantly reduce borrowing costs, ease debt servicing pressures, and create essential fiscal space. Khurram Schehzad, CEO Alpha Beta Core (ABCore) noted, “The upgrade from Moody’s, following Fitch’s revision, reinforces the perception that Pakistan is on a path to economic stability.”

IMF Agreement and External Financing

The IMF’s staff-level agreement for a USD 7 billion Extended Fund Facility (EFF) provides greater certainty over Pakistan’s external financing sources for the next two to three years. Approval by the IMF Board is expected soon, which could unlock additional funding from other multilateral and bilateral partners, according to Arif Habib Limited research report.

Foreign Exchange Reserves

Pakistan’s foreign exchange reserves have nearly doubled since June 2023, reaching USD 9.3 billion in August 2024, equivalent to just under two months of imports, said AHL report. “However, reserves remain below the level required to meet the country’s external financing needs, underscoring the importance of continued progress in the IMF program.”

External Financing Needs

Pakistan’s external financing needs are estimated at USD 26 billion for FY25, with USD 22 billion required for external principal debt repayments and USD 4 billion to cover the current account deficit. Similar financing needs are expected for Fiscal 2026-2027.

Debt Affordability and Fiscal Consolidation

Although fiscal consolidation is underway, progress may be slower than anticipated due to potential social tensions from large tax increases. Debt affordability remains very weak, with interest payments consuming 55-60% of government revenue in fiscal 2025.

Reform Implementation and Risks

Sustained reform implementation, including revenue-raising measures, is crucial for improving Pakistan’s debt affordability and securing additional financing. The new coalition government may face challenges in maintaining the pace of reforms, which could affect the continuity of financial support from official partners.

Potential for Further Improvement

The positive outlook reflects the possibility of further reductions in government liquidity and external vulnerability risks. Continued economic stabilisation and effective reform implementation could lead to a stronger fiscal position and more robust external financing, potentially supported by significant investments from Saudi Arabia and the UAE.

Khurram Schehzad, CEO Alpha Beta Core (ABCore), highlighted the importance of this Moody’s upgradation, noting that it aligns with Pakistan’s ongoing efforts to attract local and global investors through the issuance of global bonds and the privatisation of critical state-owned enterprises (SOEs). The Moody’s and Fitch upgrades are timely reinforcements of Pakistan’s economic strategy, enhancing investor confidence and improving the country’s macroeconomic outlook, he said.

“Looking ahead, there is optimism that Standard & Poor’s (S&P) will also upgrade Pakistan’s credit rating, further improving the perception and sentiment among global investors, lenders, and other credit providers,” he said.