Tag: Financial Outlook

  • Moody’s upgrades Pakistan’s credit rating to Caa2, citing improved economic stability

    Moody’s upgrades Pakistan’s credit rating to Caa2, citing improved economic stability

    Moody’s Investors Service has upgraded Pakistan’s long-term issuer rating from “Caa3” to “Caa2” with a stable outlook, reflecting a moderate improvement in the country’s macroeconomic conditions and external financial position.

    This decision follows a similar move by Fitch Ratings in July, which upgraded Pakistan’s credit rating from “CCC” to “CCC+.”

    Moody’s stated that the upgrade is a result of reduced default risks, which are now more consistent with a Caa2 rating.

    This improvement is partly due to greater certainty in Pakistan’s external financing, bolstered by the sovereign’s staff-level agreement with the International Monetary Fund (IMF) on 12 July 2024, for a 37-month Extended Fund Facility (EFF) worth $7 billion. The IMF Board is expected to approve the EFF in the coming weeks.

    Pakistan’s foreign exchange reserves have nearly doubled since June 2023, although they remain below the levels required to meet its external financing needs. The country continues to rely on timely support from official partners to fully meet its external debt obligations.

    Despite the upgrade, Pakistan’s Caa2 rating still reflects very weak debt affordability, which poses a significant risk to debt sustainability. Moody’s expects interest payments to consume about half of the government’s revenue over the next two to three years. The rating also takes into account the country’s weak governance and high political uncertainty.

    The stable outlook indicates a balance of risks, with potential for further improvement if the government can reduce its liquidity and external vulnerability risks and achieve better fiscal outcomes, supported by the IMF programme.

    Sustained implementation of reforms, particularly those aimed at increasing government revenue, could enhance debt affordability. Timely completion of IMF reviews would enable Pakistan to secure continued financing from official partners, essential for meeting external debt obligations and rebuilding foreign exchange reserves.

    The upgrade to Caa2 from Caa3 also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, which Moody’s views as direct obligations of the Government of Pakistan. The outlook for The Pakistan Global Sukuk Programme Co Ltd is positive.

    Additionally, Moody’s has raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from B3 and Caa1, respectively.

    The two-notch gap between the local currency ceiling and the sovereign rating is due to the government’s significant role in the economy, weak institutions, and high political and external vulnerability risks.

    The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects limited capital account convertibility and relatively weak policy effectiveness.

  • IMF deal to improve Pakistan’s financial outlook, but continuous reforms are essential: Moody’s

    IMF deal to improve Pakistan’s financial outlook, but continuous reforms are essential: Moody’s

    Moody’s Investors Service has stated that Pakistan’s recent staff-level agreement with the International Monetary Fund (IMF) enhances the nation’s funding prospects.

    However, the global rating agency stressed the necessity of sustained reforms to mitigate liquidity risks.

    On 12 July, Pakistani authorities and the IMF reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) worth approximately $7 billion. This agreement still awaits approval from the IMF Executive Board, with no specific date set for the vote.

    Moody’s commented that once the loan deal is approved, which is highly anticipated, it will significantly boost Pakistan’s funding prospects. The new IMF program is expected to provide reliable financing from the IMF and attract additional funding from other bilateral and multilateral partners, addressing Pakistan’s external financing needs.

    Nonetheless, Moody’s cautioned that the government’s ability to consistently implement reforms will be crucial to maintaining continuous financial support throughout the IMF program, ultimately reducing liquidity risks.

    The new IMF EFF requires Pakistan to undertake extensive reforms, including broadening the tax base, eliminating exemptions, timely managing and privatising energy enterprises, phasing out agricultural support prices and related subsidies, advancing anti-corruption measures, enhancing governance and transparency, and gradually liberalising trade policy.

    Moody’s also warned that rising social tensions, driven by the high cost of living—which could be exacerbated by increased taxes and future energy tariff adjustments—might hinder reform implementation. Furthermore, the coalition government may struggle to maintain sufficient electoral support to implement these challenging reforms consistently.

    An IMF report published in May highlighted Pakistan’s external financing needs, estimated at $21 billion for fiscal year 2025 (ending June 2025) and approximately $23 billion for fiscal years 2026-2027.

    Moody’s noted that Pakistan’s external position remains precarious, with substantial external financing requirements over the next three to five years.

    The country remains vulnerable to policy slippages, weak governance, and high social tensions, which could impair the government’s ability to advance reforms, complete IMF program reviews, and secure external financing.

  • Slow economic growth and inflation challenges persist in Pakistan: ADB Outlook Report

    Slow economic growth and inflation challenges persist in Pakistan: ADB Outlook Report

    During the last fiscal year, Pakistan faced the twin challenges of low economic growth and high inflation, in contrast to other South Asian countries.

    According to the Asian Development Bank (ADB), to foster economic improvement, Pakistan must continue implementing reforms under the new IMF programme.

    However, the ADB’s Outlook Report predicts that the economic growth rate in the upcoming financial year is expected to remain sluggish, similar to the performance observed in the previous fiscal period.

    The primary reasons for the slow economic growth were last year’s floods and the implementation of strict monetary and fiscal policies.

    The ADB’s report also highlights that inflation in Pakistan exceeded expectations during the past year. This inflationary pressure was further exacerbated by increased demand for commodities.

    In comparison, India is projected to experience a growth rate of 6.7 per cent, Sri Lanka 1.3 per cent, and Bangladesh at a rate of 6.5 per cent.