Moody's Ratings upgraded Pakistan's credit rating to Caa1 from Caa2, maintaining a stable outlook, due to an improving external financial position and progress in economic reforms. This upgrade follows a loan from the International Monetary Fund and contributed to Pakistan's dollar bonds extending gains, reaching their highest levels since early 2022.
Finance Minister Mohammed Aurangzeb suggested that the central bank might have room to cut the policy rate from 11% following positive economic indicators. Prime Minister Shehbaz Sharif welcomed the upgrade, stating it reflects the correct direction of economic policies. The announcement also saw Pakistan's international bonds rise by as much as 1 cent.
The rating agency highlighted Pakistan's strengthening external position, supported by its adherence to the IMF's Extended Fund Facility program. This is expected to lead to continued increases in foreign exchange reserves, despite still being fragile. Moody's forecasts Pakistan's external financing needs at approximately $24 billion to $25 billion in fiscal year 2026, and similar amounts in fiscal year 2027.
Moody's noted that while the sovereign's fiscal position is improving from very weak levels, supported by an expanding tax base and narrowing budget deficits, its debt affordability remains among the weakest for rated sovereigns. The agency projects the fiscal deficit to narrow further to 4.5%-5% of GDP in fiscal year 2026, down from 5.4% in fiscal year 2025. Foreign exchange reserves rose to $14.3 billion as of July 25, 2025, providing about ten weeks of import cover.
The stable outlook reflects balanced risks, with potential for further improvements in debt service and external profiles if reforms continue, but also risks of delays in reform implementation which could weaken the external position. This upgrade marks the third such positive assessment from a major global rating agency for Pakistan, following similar actions by Fitch and S&P Global Ratings.
