Despite a modest upgrade in Pakistan’s sovereign rating, Moody’s has underscored persistent vulnerabilities in the country’s external and fiscal outlook.
The agency cautioned that foreign exchange reserves remain fragile and far below the level required to meet looming external obligations, while debt affordability continues to rank among the weakest of all rated sovereigns. It further warned that any slippage in reform implementation or delays in IMF reviews could once again erode external stability, placing Pakistan at heightened risk.
The global credit evaluator still elevated Pakistan’s sovereign credit standing by a notch, advancing it from Caa2 to Caa1, while simultaneously moderating the outlook from “positive” to “stable.” The agency underscored Islamabad’s fortifying external buffers as the principal catalyst behind this decision. Moody’s operates one of the most authoritative grading frameworks for measuring the creditworthiness of states, corporations, and debt securities. In its communiqué, the New York–based ratings house declared: “Moody’s Ratings has elevated the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2.” The institution further amended the country’s trajectory to “stable,” reflecting a leveling of risks in the foreseeable horizon. The agency simultaneously revised upward the grade of Pakistan’s senior unsecured medium-term note programme, assigning it (P)Caa1 in place of the earlier (P)Caa2.
According to Moody’s, the rationale for the elevation is intertwined with Pakistan’s improving external posture, underpinned by its incremental compliance with reforms outlined in the International Monetary Fund’s Extended Fund Facility (EFF). Yet, the report tempered optimism by cautioning that the sovereign remains hamstrung by fragile governance and persistent political flux. It projected that foreign exchange reserves are poised for further accretion, though Pakistan’s reliance on well-timed disbursements from multilateral and bilateral patrons would persist. Parallel to this, the country’s fiscal complexion — once enfeebled — has shown tentative rejuvenation, aided by widening taxation streams. Nevertheless, debt affordability continues to languish among the weakest globally.
By ascribing a “stable” outlook, Moody’s signaled equilibrium: upside prospects rest in accelerated relief in debt-servicing pressures and a sturdier external ledger; conversely, hazards linger in potential deferrals of reform execution, which could unravel hard-won gains in financial steadiness.
The ratings house clarified that the upgrade to Caa1 also extends to the backed foreign currency senior unsecured notes under the Pakistan Global Sukuk Programme Co Ltd, with its outlook equally reset to “stable.” Additionally, Moody’s adjusted Pakistan’s country ceilings, lifting the local currency ceiling to B2 from B3, and the foreign currency ceiling to Caa1 from Caa2. The two-notch divergence between the sovereign rating and the local currency ceiling was attributed to Islamabad’s oversized economic footprint, institutional frailty, and heightened exposure to both domestic and external volatilities.
“Pakistan’s external position has continued to strengthen over the past year,” Moody’s said, adding it expected further gradual improvements as progress in reform implementation under the IMF programme supports financing from bilateral and multilateral partners. “In turn, this contributes to continued increases in the sovereign’s foreign exchange reserves, albeit from still fragile levels,” it noted.
“We expect Pakistan to fully meet its external debt obligations for the next few years, contingent on steady progress on reform implementation and timely completion of IMF reviews. Nonetheless, Pakistan’s external position remains fragile,” Moody’s cautioned. “Its foreign exchange reserves remain well below what is required to meet its external debt obligations, underscoring the importance of steady progress with the IMF programme to continually unlock financing,” it explained, estimating that Pakistan’s external financing needs were about $24-25bn in FY2026, and similar amounts again in FY2027.
Detailing its rationale for the rating upgrade, Moody’s noted that Pakistan fully met its external debt obligations and added to its foreign exchange reserves in FY2025. “Reserves rose to $14.3 billion as of 25 July 2025, equivalent to about ten weeks of imports,” it said, comparing them to $9.4bn at the time of the last rating update in August 2024.
The agency also pointed out Pakistan’s successful completion of the IMF programme’s first review, unlocking a $1bn disbursement in May 2025, and a $1bn commercial loan in June 2025 by the Asian Development Bank (ADB). Outlining its rationale for the stable outlook rank, Moody’s observed that it reflected “balanced risks to Pakistan’s credit profile”.
On the upside, it said, a building track record of reforms and revenue-raising measures could unlock more financing, which in turn would further boost foreign exchange reserves and the external position. “On the downside, there remains risks of slippage in reform implementation or results, leading to delays in or withdrawing of financing support from official partners,” it warned, saying it could lead to renewed material deterioration in the sovereign’s external position.
“The current government formed after the February 2024 elections faces a significant challenge to continually implement revenue-raising measures without triggering social tensions,” the agency underscored. Pakistan’s fiscal position has improved from very weak levels, reflecting progress in implementing revenue-raising measures, Moody’s observed.
Citing narrowing budget deficits and widening primary surpluses, the rating agency said the government debt affordability was “also improving, although it remains one of the weakest among our rated sovereigns”. Noting strengthened revenue collection, it said: “We expect the government to continue enhancing revenue administration and compliance, alongside the introduction of new tax measures.”
Noting new taxes introduced on solar panels and e-commerce businesses in the recent budget, Moody’s estimated tax revenues to pick up by another 0.5 percentage points of GDP in FY2026. “However, a decline in SBP dividends will lead to an overall narrowing of government revenue to about 15-15.5 per cent of GDP,” it added.
Moody’s stressed that Pakistan’s fiscal and external improvements remain tenuous, with the government still heavily reliant on timely support from official partners. The challenge of raising revenues without fueling public discontent, coupled with fragile reserves and one of the world’s weakest debt affordability profiles, leaves the sovereign exposed to renewed instability if reforms falter.