Moody’s Upgrades Pakistan’s Sovereign Rating to B3 from Caa1

Moody’s said the upgrade reflects its expectation that improvements in governance will help the government sustain gains in Pakistan’s external position and strengthen fiscal performance. It also noted that the country’s external vulnerability risks have eased since its previous rating action in August 2025.

Pakistan’s foreign exchange reserves rose to around $17 billion by the end of July 2026, compared with $14 billion a year earlier, providing nearly three months of import cover. Moody’s said Pakistan’s external vulnerability indicator also improved significantly, falling to around 145% in 2026 from 230% in 2025.

The agency attributed the improvement partly to continued implementation of the IMF-supported reform programme, which it said has strengthened policy credibility, supported macroeconomic stability and helped secure financing from official creditors.

Pakistan has also regained gradual access to international capital markets, including a $750 million three-year Eurobond issued in April 2026 and a CNY 1.75 billion ($250 million) Panda bond issued in May 2026. These developments have helped the country build reserves while meeting its external obligations during fiscal year 2026.

Moody’s expects Pakistan’s foreign exchange reserves to rise to around $19–20 billion by the end of FY2027 and $20–21 billion in FY2028, provided the government continues implementing the IMF programme and maintains access to official and market financing.

The rating agency also highlighted a significant improvement in Pakistan’s debt affordability. Interest payments accounted for around 35% of government revenue in FY2026, down from 49% in FY2025. Moody’s expects this improvement to remain sustainable if macroeconomic stability is maintained.

However, Moody’s warned that Pakistan’s credit profile remains vulnerable. Structural weaknesses include a fragile external position, high external financing requirements, weak debt affordability, a narrow revenue base and limited capacity to attract investment and generate high-productivity economic growth.

The agency said the stable outlook reflects a balance between the possibility of further improvement in Pakistan’s credit fundamentals and the risks that could weaken access to foreign-currency financing and reduce the government’s fiscal flexibility.

Moody’s also raised Pakistan’s local and foreign currency country ceilings to B1 and B3, respectively, from B2 and Caa1.