Ratings agency cites stronger reserves and better debt affordability while keeping outlook stable
Moody’s has upgraded Pakistan’s sovereign credit rating to B3 from Caa1, citing improved governance, stronger foreign exchange reserves, and better debt affordability, while maintaining a stable outlook for the country’s economy.
According to Business Recorder, the ratings agency said the upgrade reflects its expectation that improvements in governance will allow the government to sustain recent gains in the country’s external position and strengthen its fiscal metrics. The stable outlook, it added, balances the potential for faster improvement in Pakistan’s credit fundamentals against the risks that remain.
Central to the decision was a marked strengthening of Pakistan’s external buffers. The agency noted that foreign exchange reserves rose to about $17 billion at the end of July 2026, up from $14 billion a year earlier, enough to cover close to three months of imports. Its estimate of Pakistan’s external vulnerability indicator, which measures maturing debt against available reserves, improved sharply to around 145 percent in 2026 from 230 percent in 2025.
The country has also regained gradual access to international capital markets. Moody’s pointed to a three-year, $750 million Eurobond issued in April 2026 and a debut Panda bond worth 1.75 billion yuan, roughly $250 million, in May. Together, the agency said, these developments allowed Pakistan to build reserves while meeting all of its external obligations during fiscal 2026.
Debt affordability improves as borrowing costs fall
Debt affordability, long a weak point for the country, showed clear improvement. Interest payments consumed about 35 percent of government revenue in fiscal 2026, down significantly from 49 percent the previous year, a change driven largely by lower domestic interest rates following a decline in inflation. Although the policy rate was later raised modestly as inflation rebounded, it stood at a relatively low 11.5 percent in July 2026.
Moody’s credited continued implementation of the reform program backed by the International Monetary Fund with strengthening policy credibility, supporting macroeconomic stability, and helping secure financing from official creditors. It projected that foreign exchange reserves would climb to between $19 billion and $20 billion by the end of fiscal 2027, and to between $20 billion and $21 billion in fiscal 2028, provided the government stays on track with the program.
Risks remain despite the credit rating upgrade
The agency noted that risks remain. It said Pakistan’s external position is still vulnerable to shocks given its large external financing needs, and that international surveys of governance, while showing early signs of improvement, continue to point to weak rule of law, limited control of corruption, and constrained government effectiveness. Alongside the sovereign upgrade, Moody’s raised Pakistan’s local and foreign currency country ceilings to B1 and B3 respectively.
The move follows a similar decision from another major agency. In July 2026, S&P Global Ratings raised Pakistan’s long-term sovereign credit rating to B from B-, also assigning a stable outlook and citing improved political and institutional stability that had helped the government implement difficult reforms. The higher rating is expected to reduce perceived risk, lower future borrowing costs, and support a fuller return to international bond markets on more favorable terms.
