Pakistan upgraded to B3 from Caa1 by Moody’s

August 24, 2026 (MLN): Moody's Ratings has upgraded the Government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to B3 from Caa1, citing sustained improvements in the country's external position and strengthening fiscal metrics.

The rating agency has kept the outlook stable and also raised the senior unsecured MTN programme rating to (P)B3 from (P)Caa1.

Moody's said the upgrade reflects its expectation that improvements in governance will allow the government to sustain recent gains in the external account while continuing to strengthen fiscal indicators.

Pakistan's external vulnerability risks have eased further since the agency's last rating action in August 2025, with foreign exchange reserves building steadily on the back of sustained macroeconomic stabilization.

Lower domestic financing costs amid monetary easing, alongside an improved fiscal position, have driven a material improvement in Pakistan's debt affordability, the agency noted.

It added that Pakistan's strengthening credit profile is showing greater resilience to external shocks compared to previous cycles, including the ongoing conflict in the Middle East.

Despite these gains, Moody's flagged that Pakistan's credit profile remains vulnerable, pointing to a structurally fragile external position, weak debt affordability, a still-narrow revenue base, and constraints on attracting investment and driving high-productivity growth.

These constraints remain embedded in the B3 rating, the agency said.

The stable outlook, according to Moody's, balances the possibility of faster improvement in Pakistan's credit fundamentals against risks tied to the vulnerabilities above  risks that, if realised, could weaken access to foreign-currency financing and further reduce fiscal flexibility.

The upgrade to B3 from Caa1 also extends to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, with Moody's viewing the associated payment obligations as direct obligations of the Government of Pakistan.

The outlook for the Sukuk Programme Co Ltd also remains stable.

Alongside the rating action, Moody's raised Pakistan's local and foreign currency country ceilings to B1 and B3, from B2 and Caa1 respectively.

The agency said the two-notch gap between the local currency ceiling and the sovereign rating stems from the government's relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk, while the gap between the foreign and local currency ceilings reflects incomplete capital account convertibility, relatively weak policy effectiveness, and risks of transfer and convertibility restrictions being imposed.

Pakistan's standing across the three major rating agencies now places Fitch's long-term foreign currency debt rating at B-, with a stable outlook, while S&P holds the country at B, also with a stable outlook.

Pakistan's foreign exchange reserves rose to about $17bn at end-July 2026, up from $14bn a year earlier, covering nearly three months of imports.

The report's estimate of Pakistan's External Vulnerability Indicator  the ratio of short- and long-term maturing debt to foreign exchange reserves  has improved to about 145% in 2026, compared to 230% in 2025.

Continued implementation of the IMF-backed reform programme has strengthened policy credibility and underpinned financing from official creditors, the report said, while Pakistan has also regained gradual access to market financing, including a three-year, $750mn Eurobond issued in April 2026 and a CNY 1.75bn (about $250mn) debut Panda bond in May 2026.

Reserves are projected to rise to about $19–20bn by the end of fiscal 2027 and $20–21bn in fiscal 2028, assuming continued progress on the IMF programme.

External financing needs are estimated at around $21bn in fiscal 2027 and about $30bn in fiscal 2028, of which $7bn and $12bn respectively comprise existing bilateral deposits expected to be rolled over.

Interest payments absorbed about 35% of government revenue in fiscal 2026, down sharply from 49% in fiscal 2025, largely on the back of lower domestic interest rates following a sharp decline in inflation.

The policy rate stood at 11.5% in July 2026, down from a peak of 22% between June 2023 and May 2024, even after modest hikes as inflation rebounded.

Debt affordability is projected to hold broadly steady at about 35% over the next one to two years  still weak but more manageable  before improving gradually as fiscal consolidation reduces the government's debt burden. 

Copyright Mettis Link News