Moody’s Ratings (Moody’s) on Monday upgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to B3 from Caa1.
“We have also upgraded the rating for the senior unsecured MTN programme to (P)B3 from (P)Caa1. Concurrently, we maintained the outlook for the Government of Pakistan at stable,” the credit rating agency said.
Last year in August, Moody’s upgraded Pakistan’s ratings to Caa1 from Caa2.
Moody’s on Monday said that the upgrade to B3 reflects its expectations that improvements in governance will allow the government to sustain the recent improvements in the country’s external position and strengthen fiscal metrics.
“Pakistan’s external vulnerability risks have eased further since our last rating action in August 2025, with foreign exchange reserves building steadily, supported by sustained macroeconomic stabilisation.
“At the same time, lower domestic financing costs amid monetary easing and an improved fiscal position have driven a material improvement to Pakistan’s debt affordability,” it said.
Moody’s noted that Pakistan’s strengthening credit profile is also demonstrating greater resilience to external shocks than in previous cycles, including the ongoing Middle East conflict.
“Notwithstanding these improvements, Pakistan’s credit profile remains vulnerable due to a structurally fragile external position, weak debt affordability, a still relatively narrow revenue base and constraints on attracting investment and stimulating high-productivity and economic growth. These credit constraints are embedded in the B3 rating,” it said.
The agency said that the stable outlook balances a potentially faster improvement in Pakistan’s credit fundamentals against outstanding risks related to the vulnerabilities above, “which, if materialised, could weaken access to foreign-currency financing and further reduce fiscal flexibility”.
The upgrade to B3 from Caa1 also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, it said.
“The associated payment obligations are, in our view, direct obligations of the Government of Pakistan. The outlook for The Pakistan Global Sukuk Programme Co Ltd remains stable,” it said.
Moody’s also raised Pakistan’s local and foreign currency country ceilings to B1 and B3, from B2 and Caa1 respectively.
Rationale for the upgrade to B3
Moody’s noted that Pakistan’s foreign exchange reserves increased to about $17 billion at the end of July 2026, from $14 billion at the end of July 2025, sufficient to cover nearly three months of imports.
“Our estimate of Pakistan’s External Vulnerability Indicator (the ratio of short-term and long-term maturing debt to foreign exchange reserves) has improved to about 145% in 2026, compared to 230% in 2025.
“Continued implementation of the IMF-supported reform programme has strengthened policy credibility, maintained macroeconomic stabilisation and underpinned financing from official creditors,” it said.
The credit rating also highlighted that Pakistan has regained gradual access to market financing, including a three-year, $750 million Eurobond issued in April 2026 and a CNY 1.75 billion (about $250 million) debut Panda bond in May 2026.
“Together, these developments have enabled an accumulation of reserves while allowing Pakistan to meet all of its external obligations in fiscal 2026,” it said.
Moody’s expects Pakistan’s foreign exchange reserves to rise to about $19-20 billion at the end of fiscal 2027 (July 2026 to June 2027) and $20-21 billion in fiscal 2028.
“These projections assume that the government will sustain progress on the IMF programme, enabling timely disbursements from official partners and continued gradual access to market financing,” it said.
External position vulnerable
Pakistan’s external position remains vulnerable to shocks, particularly given still-large external financing requirements, said Moody’s.
“However, the projected reserve accumulation provides a larger buffer than in recent years against adverse market or commodity-price developments, including the elevated oil prices associated with the ongoing Middle East conflict.
“Higher reserves, stable exchange rates and lower inflation collectively increase Pakistan’s capacity to absorb such shocks relative to prior cycles,” it said.
Improvements in debt affordability expected to sustain
Moody’s said that Pakistan’s debt affordability has improved materially, from very weak levels.
“Interest payments absorbed about 35% of government revenue in fiscal 2026, down sharply from 49% in fiscal 2025. The improvement primarily reflects a significant reduction in domestic interest rates following a sharp decline in inflation,” said Moody’s.
The agency noted that earlier disinflation allowed the central bank to cut the policy rate significantly.
“We expect the recent improvement in Pakistan’s debt affordability to be durable, underpinned by sustained macroeconomic stability.
“We project Pakistan’s debt affordability to remain broadly stable at about 35% for the next one to two years, still a weak level but a more manageable one. Thereafter, we expect debt affordability to improve gradually as fiscal consolidation reduces the government’s debt burden and interest expenditure,” it said.
Moody’s noted that although inflation remains sensitive to exchange-rate movements and external shocks, improved external buffers, a more stable macroeconomic environment and the authorities’ commitment to fiscal consolidation should help contain inflationary pressures and support debt affordability gains.
“Although higher global energy prices stemming from geopolitical tensions pose upside risks to inflation, we expect Pakistan’s strengthened policy framework and improved economic resilience to mitigate their impact,” said Moody’s.
