Moody’s Upgrades Pakistan’s Credit Rating to Caa1: A Sign of Economic Recovery

Moody’s Upgrades Pakistan’s Credit Rating to Caa1: A Sign of Economic Recovery

Moody’s Upgrades Pakistan’s Credit Rating to Caa1: A Sign of Economic Recovery

Moody’s upgrade of Pakistan’s credit rating to Caa1 from Caa2 marked a pivotal moment for the nation's economic trajectory. Bolstered by progress under the IMF's Extended Fund Facility (EFF) program, the move—announced on August 13, 2025—signals a stabilizing outlook for Pakistan’s external financial position and fiscal health. ReutersDawnPeople's Daily Online


1. Why Caa1 Matters

Within Moody’s spectrum, Caa1 is the least risky of the “Caa” category ratings—indicating very high credit risk, but notably an improvement over Caa2. Alongside the upgrade, Moody’s assigned a stable outlook, suggesting this rating should hold steady in the near term. DawnReuters Impact? It boosts Pakistan’s credibility in international financial markets and paves the way for better borrowing terms.


2. Boost From IMF Reforms & Reserve Strength

The rating agency underscored Pakistan’s boosted foreign exchange reserves—helped by IMF disbursements and ADB support—as a major anchor for the upgrade. These reserves, now around $14.3 billion, reflect nearly ten weeks of import coverage—up from significantly lower standings last year. Ground NewsPeople's Daily Online

Moody’s also highlighted Pakistan’s reform implementation under its EFF program, citing improvements in revenue generation and debt servicing capacity, which have collectively supported the rating shift. DawnPeople's Daily Online


3. Reversed Momentum in Bonds & Borrowing Costs

Following the upgrade, Pakistan’s international bonds experienced a surge, peaking at valuations between 90 and 100 cents on the dollar—levels not seen since early 2022. Reuters The enhanced credit rating buoyed investor confidence, reducing borrowing costs and fostering access to international capital—crucial as Pakistan navigates external financing needs estimated at $24–25 billion in FY2026. The Express TribunePeople's Daily Online


4. Broader Policy Impact & Interest Rate Outlook

Finance Minister Muhammad Aurangzeb hailed the rating adjustment as validation of economic reforms. He also hinted at room for a policy rate reduction—currently at 11%. Analysts are eyeing the central bank’s next decision on September 15, hoping for rate cuts if inflation remains favorable. ReutersArab News PK


5. Caveats: Governance & Fragile Resilience

Despite the positive tone, Moody’s cautioned about ongoing political risk and Pakistan’s still fragile external position. Weak governance and continued reliance on IMF support remain constraints. The Express TribuneDawn

Debt affordability, while improved, continues to rank among the weakest globally. The rating agency underscored that sustained reforms are essential to preserve the new rating and attract further capital. People's Daily OnlineThe Express Tribune


6. Historical Context: From Crisis to Gradual Recovery

Pakistan’s economy faced severe challenges from 2022 to 2024—ranging from a macroeconomic crisis to skyrocketing inflation and foreign exchange volatility. Wikipedia However, mid-2025 data reveals signs of rebound: inflation eased to multi-year lows, reserves stabilized, and sovereign risk declined—evidenced by a 12% improvement in default risk. Wikipedia

Before Moody’s upgrade, Fitch and S&P Global had already improved their outlooks on Pakistan, underscoring a consensus that the economy was inching toward recovery. X (formerly Twitter)Dawn


7. What’s Next?

Sustained reform momentum will be critical. The government must preserve progress under IMF oversight while enhancing governance and revenue frameworks. Continued improvements in reserves and policy confidence will help secure better credit ratings in the future.


Moody’s Upgrades Pakistan’s Credit Rating to Caa1

Moody’s Investors Service has upgraded Pakistan’s credit rating from Caa2 to Caa1 with a stable outlook, citing improved external financial conditions, stronger foreign reserves, and progress on IMF-led reforms. This upgrade marks a significant step toward economic stability, enhancing investor confidence and lowering borrowing costs. The move follows improvements in revenue generation, debt servicing, and foreign exchange reserves—now covering around 10 weeks of imports. However, political risks, governance challenges, and reliance on IMF support remain key concerns. Sustaining reform momentum will be essential for securing further rating improvements.