Pakistan’s banking sector is basking in a rare glow, with Moody’s upgrading its outlook to “positive” from “stable,” a nod to stronger profits and a slowly healing economy.
The banks have been padding their pockets, thanks to the government’s hefty borrowing at sky-high rates, even if they’ve been stingy with loans to everyday businesses. Meanwhile, the country’s tied tight to a $7 billion IMF lifeline, forcing confessions about six undercapitalized microfinance banks and a promise to hold off on deposit insurance until they’re fixed. It’s a tale of two recoveries—one riding on government debt, the other wrestling with old habits and IMF demands—both shadowed by a fragile fiscal tightrope.
Global rating agency Moody’s has given Pakistan’s banking sector a pat on the back, lifting its outlook from “stable” to “positive” as finances strengthen and the economy claws its way out of a rough patch. “We’re seeing a banking system that’s holding its own and a country that’s starting to find its footing after a shaky year,” Moody’s said in a recent statement, pointing to healthier bank balance sheets and a brighter macroeconomic scene compared to the gloom of 2023.
Pakistan’s banks have been raking in hefty profits over the last couple of years, but don’t expect a round of applause just yet—they’ve been sitting on their cash rather than fueling economic growth. Lending to businesses and households? Barely a trickle. Instead, the banks have been cashing in on the government’s borrowing spree, which hit a jaw-dropping 22% interest rate—and sometimes higher—throughout fiscal year 2024. It’s been a goldmine for them, even if it’s left the broader economy wanting.
Rewind to 2023, and the picture was grim. All the big rating agencies had slashed Pakistan’s economic outlook, slamming the door shut on international bond markets and leaving the country scrambling for dollars. That hurdle still looms large. Finance Minister Mohammad Aurangzeb jetted off to Washington a few months ago to sweet-talk the agencies, laying out Pakistan’s progress in hopes of turning the tide. Moody’s isn’t blind to the challenges. “Pakistan’s long-term debt mess is still a ticking time bomb,” they warned, flagging the country’s shaky fiscal health, tight liquidity, and exposure to external shocks. But there’s a silver lining: the economy’s expected to grow by 3% in fiscal year 2025, up from 2.5% in 2024 and a painful contraction of 0.2% in 2023. The State Bank of Pakistan echoes that optimism, pegging growth between 2.5% and 3.5%. Moody’s is even more bullish, forecasting 3% in 2025 and 4% in 2026, fueled by a massive 1,000-basis-point rate cut since June 2024 kicked off the easing cycle.
Inflation, that old beast, is finally calming down too. “We’re looking at about 8% in 2025, a far cry from the 23% average we saw in 2024,” Moody’s noted. It’s a welcome breather for a nation that’s been gasping under price pressures. The banks’ rosy outlook isn’t just their own story—it’s tied tightly to the government’s fortunes, rated Caa2 with a positive spin by Moody’s. Pakistani banks are practically joined at the hip with the state, holding a mountain of government securities that make up about 55% of their assets as of September 2024. That’s a double-edged sword: as the government’s credit improves from rock-bottom levels, the banks ride the wave. “They’ve got decent capital cushions,” Moody’s added, “thanks to slow loan growth and steady cash flow, even if they’re still generous with dividends.”
Not everything’s perfect, though. Problem loans ticked up to 8.4% of total loans by September 2024, from 7.6% a year earlier. Still, loans are just 23% of bank assets—most of their chips are on government paper, not risky lending. Moody’s take? A “positive” outlook isn’t a promise of a rating bump—it’s more like a nod to a steadier ship in choppy waters, assuming the credit risks don’t flare up again.
Behind the scenes, Pakistan’s been busy tidying up its banking rulebook. Last year, the government teamed up with the IMF, tweaking laws to match global standards on early intervention, bank rescues, and deposit insurance. The cabinet and parliament gave their nods, and two struggling private banks got a capital lifeline, with promises of swift action if others stumble. So, here’s Pakistan’s banking sector—flush with cash, tethered to a recovering government, and cautiously stepping into a brighter spotlight. Moody’s is watching, and for once, it likes what it sees.
Pakistan’s dance with the IMF has been a rocky one, and the leverage slipped away back in 2019. That’s when Fund staff dug in their heels, refusing to budge on loans without ironclad upfront conditions. Why the hard line? They’d seen this movie before—past governments jumping into IMF programs only to bail halfway or undo reforms for political brownie points. It’s a pattern that’s left Pakistan’s economy wobbling, even after 21 rounds with the Fund.
Some economists point fingers elsewhere, blaming the country’s boom-bust rollercoaster. Picture this: a boom fueled by a flood of raw material imports jacks up the current account deficit, screaming for an IMF bailout. Then come the Fund’s tight-fisted policies—slashing deficits by choking import demand, which drags growth into the mud. It’s a vicious cycle that’s tough to break.
Others aren’t so kind to the IMF, arguing its playbook hasn’t evolved much over the years. But here’s the kicker: whether led by civilians or the military, Pakistan’s leadership has a habit of tapping technocrats as finance ministers—often the same faces recycled over and over, with little to show for it. What the country really needs, some say, is a finance chief with a fresh perspective—someone steeped in academia, armed with homegrown economic models, not just imported fixes. Moody’s recent upbeat outlook tweak—not a full rating upgrade—suggests the current crew is at least sticking to last year’s IMF script.
But hold the applause. There’s a storm brewing: the government’s mulling a massive loan—over a trillion rupees—from commercial banks to tackle the energy sector’s circular debt. With banks already knee-deep in government securities (55% of their assets) and heavily tied to the shaky power sector, this could be a step too far. The IMF might not stay quiet if it sees banks sinking deeper into a power industry that’s been a mismanaged mess for years. Pakistan’s on a tightrope—balancing recovery hopes with risks that could tip it right back into trouble.
Pakistan’s banks might be flashing a brighter smile with Moody’s approval, but the road ahead is anything but smooth. The government’s plan to borrow big from these same banks to tame the energy sector’s circular debt could stir trouble, especially with the IMF watching closely—after all, the power sector’s a notorious mess, and banks are already overexposed. Add in the IMF’s insistence on fixing those wobbly microfinance players, and it’s clear the country’s juggling hope with hazard. For now, sticking to last year’s IMF deal has earned a cautious thumbs-up from Moody’s, but real progress hinges on breaking free from the boom-bust trap and finding a finance visionary who can chart a steadier course. The climb’s underway, but it’s a shaky one.