Moody’s Upgrades Pakistan’s Credit Rating, Signaling Economic Improvement

This is positive news for Pakistan’s economy as Moody’s Ratings has raised Pakistan’s local and foreign currency issuer and senior unsecured debt rating from Caa3 to Caa2. It is attributed to a gradually enhancing macroeconomic environment and a somewhat enhanced government’s liquidity and external balance. The rating agency has also shifted the outlook for Pakistan from stable to positive. This comes after Pakistan signed a staff-level agreement with the International Monetary Fund (IMF) for an Extended Fund Facility of 37 months worth of $7 billion. The upgrade means lower default risk and higher reliability of the external sources of financing in Pakistan’s case.

Improved Economic Outlook

The following are the reasons why Moody’s has issued an upgrade on Pakistan’s ratings: Since June 2023, the country’s foreign exchange reserves have increased to about two times, but still are insufficient for covering external financing needs. The rating agency has anticipated that the IMF Executive Board will ratify the loan arrangement of Pakistan in the next few weeks that will provide additional support to the country.

The improvement in the rating to Caa2, however, indicates that Pakistan has a poor debt sustainability in terms of affordability. According to Moody’s, interest costs are expected to remain around 50% of government revenue in the next two to three years. The rating also incorporates Pakistan’s low governance and high political risk.

The positive outlook assigned by Moody’s suggests that there could be other enhancements in Pakistan’s liquidity and external vulnerability risks profile. It also implies a possibility of a superior fiscal position than currently envisaged by the IMF programme.

Challenges and Opportunities Ahead

Nevertheless, there are some problems for Pakistan. The country has many challenges even after the upgrade. The country still depends on timely funding from the official creditors to meet its external debt services in full. But as Moody’s points out, successful continuation of reform implementation, including the measures to raise revenues, may help the government to expand its revenue base and make its debts more affordable.

The rating agency also underlines that the consistent record of the completion of IMF reviews on time would enable Pakistan to unlock financing from official partners continuously. This would be adequate in order to service its external debt and undertake additional reconstruction of foreign exchange reserves.

Moody’s has also increased Pakistan’s local and foreign currency country ceiling to B3 and Caa2 from Caa1 and Caa3 respectively. The difference of two notches between the local currency ceiling and the sovereign rating is due to the enormous role of the government in the economy, the low institutional quality, and high levels of political and external vulnerability risk.