Islamabad:
Moody’s Wednesday upgraded Pakistan’s credit rating to the speculative quality of CAA1, it lifted from the brink of default and noted that although debt -affordable prices have improved, it remains the weakest among peers.
The rating agency – one of the world’s top three – raised Pakistan’s status for the first time in one year and awarded a “stable” view that refers to overall improvements in the country’s external and tax positions. Pakistan had a serious risk of default less than two years ago.
The Global Credit Rating Agency has recognized the efforts that the government has put into the past over a year and a half to stabilize the economy.
“Moody’s ratings have upgraded the government of Pakistan’s local and foreign currency issuer and senior unsecured debt assessments to CAA1 from CAA2,” reads the message.
Pakistan still remains at least one notch below the minimal investment quality that the government needs to issue international sovereign bonds at competitive prices. The government is still unable to flow these bonds due to more risky credit rating that often leads to double -digit interest rates.
Moody’s has also warned of the “fragile” position for the currency reserves despite improvements due to higher refund of debt, estimated at $ 50 billion for two financial years.
“Pakistan’s external position remains fragile. Its currency reserves remain far below what is required to meet its external debt obligations, which emphasizes the importance of stable progress with the IMF program to constantly unlock funding,” added it.
Moody’s has estimated Pakistan’s external financing needs for around $ 24-25 billion in for this financial year and similar amounts again for the next financial year 2026-27, bringing the total needs of $ 50 billion.
The higher external repayments of debt hold the Ministry of Finance in a tight position, which remains admitted throughout the financial year to get old loans refinanced. The ministry has played an important role in ensuring a certain sense of fiscal caution despite competing requirements for additional budgets.
The rating agency said the upgrade to CAA1 reflected Pakistan’s improved external position, supported by its progress in reform implementation under the IMF program. The currency reserves are likely to continue to improve even if Pakistan will remain dependent on timely financing from official partners, it added.
Moody’s said it expects further gradual improvement as progress in reform implementation under the IMF program supports funding from bilateral and multilateral partners, but said the foreign reserves remain “still (at) fragile levels”.
It does not see any disturbance in Pakistan’s refund of external debt in the next few years.
While commenting on the fiscal situation, Moody’s said Pakistan’s fiscal position also strengthened from very weak levels, supported by an expanding tax base.
“Debt -affordable prices are improved, but are still one of the weakest among nominal sovereign,” added it.
Moody’s said the country’s total budget deficit was narrowed and that primary profits were expanded. The registration of government debt also improved, although it is still one of the weakest among our nominal sovereign.
But it warned that there will be risks of delays in the reform implementation required to ensure timely official funding, which in turn would weaken the external position of Pakistan.
Strengthen fiscal policy
The rating agency said the government has strengthened its revenue collection through a combination of better enforcement and new tax measures. Total revenue increased to approx. 16% of GDP in the last financial year from 12.6%, led by a large increase in tax revenue, corresponding to approx. 2% of GDP.
The government’s income, which is not tax, also increased sharply due to a one -time extraordinary dividend from the State Bank of Pakistan.
It has estimated tax revenue to pick up with additional half percentage in GDP in this financial year, but said that a decrease in SBP outcomes will lead to a total narrowing of public revenue to approx. 15-15.5% of GDP.
The rating agency said the government was facing a significant challenge to constantly implement revenue measures without triggering social tensions.
It hoped that the government would keep a control over spending, “even when budgeted defense spending has risen” after war with India. The government has gradually reduced subsidies to the electricity sector along with progress with reforms of the energy sector.
While commenting on the debt position, Rating Agency said the debt service prices are also reduced due to falling domestic interest rates in tandem with lower policy rates.
“In general, we expect the tax deficit to narrow further to 4.5-5% of GDP in this financial year.” In the last financial year, the government’s deficit was 5.4% of GDP, which was better than the goal.
Due to reduction in interest rates, interest payments would amount to approx. 40-45% of revenue in this and the next financial year, which is a significant fall from approx. 60% in FY2024. But the rating agency said interest payments were very high international and a key credit limit.
It warned that there is a risk of sliding in reform implementation or results, which led to delays in or withdrawal of financing support from official partners. This in turn can lead to deterioration of renewed material in the external position of the sovereign, it added.
