Moody’s, a leading global credit rating agency, has upgraded Pakistan’s banking sector outlook from stable to positive, citing stronger financial performance and a recovery in macroeconomic conditions following last year’s economic challenges.
The agency’s latest report highlighted that Pakistani banks hold approximately 50% of their total assets in government securities, reflecting their significant exposure to sovereign bonds. The improved outlook is attributed to better liquidity conditions and enhanced external financing, aligning with the positive trend in the government’s credit rating.
Moody’s emphasized that the upgrade mirrors Pakistan’s improved sovereign credit rating, as banks remain heavily reliant on government debt. The agency acknowledged that fiscal and monetary measures, supported by an International Monetary Fund (IMF) program, have played a key role in stabilizing the economy.
Pakistan’s economy has shown signs of recovery, with Moody’s projecting a GDP growth rate of 3% for 2025, up from 2.5% in 2024 and a contraction of 0.2% in 2023. Inflation, which averaged 23% in 2024, is expected to decline significantly to around 8% in 2025.
The agency pointed to the 37-month, $7 billion IMF Extended Fund Facility, approved in September 2024, as a critical factor in addressing Pakistan’s external financing needs. Combined with policy reforms, this has boosted investor confidence and stabilized the financial sector.
However, Moody’s cautioned that risks persist, particularly due to Pakistan’s reliance on external funding, the need for fiscal discipline, and political stability concerns. The banking sector’s heavy investment in government securities also poses risks in the event of sovereign distress.
Financial experts suggest that while the positive outlook is a step in the right direction, sustained economic growth will require structural reforms. These include improving tax collection, enhancing governance, and attracting foreign direct investment.
Moody’s has adjusted Pakistan’s credit rating multiple times in response to the country’s economic shifts. In October 2022, the agency downgraded Pakistan’s sovereign credit rating from B3 to Caa1, citing heightened liquidity and external vulnerability risks, worsened by devastating floods that severely impacted the economy.
By March 2023, the situation had further deteriorated, prompting Moody’s to lower the rating to Caa3 due to fragile liquidity and critically low foreign exchange reserves, raising concerns about Pakistan’s ability to meet external debt obligations.
However, by August 2024, signs of economic recovery emerged. Moody’s upgraded Pakistan’s rating to Caa2, reflecting improved macroeconomic conditions and the approval of the $7 billion IMF Extended Fund Facility, which strengthened the country’s external financing outlook.
