By Global credit rating agency Moody’s Investors Service has upgraded Pakistan’s long-term issuer rating from Caa2 to Caa1, maintaining a “stable” outlook, in a move that signals growing investor confidence in the country’s economic turnaround. The upgrade comes despite Pakistan’s record $267 billion debt burden and persistent political risks.
The decision, announced on Wednesday, follows similar moves earlier this year by S&P Global Ratings and Fitch Ratings, both of which also raised Pakistan’s credit standing while keeping a stable outlook.
Moody’s cited stronger foreign exchange reserves, easing inflation, and steady progress under the $7 billion, 37-month International Monetary Fund (IMF) Extended Fund Facility (EFF) as the main factors driving the upgrade.
“The upgrade to Caa1 reflects Pakistan’s improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility,” Moody’s said in its statement. However, it also cautioned that “debt affordability remains one of the weakest among rated countries” and flagged continuing governance and political challenges.
Economic Gains Fuel Optimism
Pakistan’s macroeconomic indicators have improved notably over the past year.
- Foreign exchange reserves rose from $9.4 billion in August 2024 to $14.3 billion in July 2025, giving the country greater import cover and external stability.
- Inflation, which peaked at an alarming 37.97% in May 2023, has plunged to 4.1% in July 2025 after briefly hitting a low of 0.3% in April this year.
- GDP growth rebounded from -0.2% in FY2023 to 2.5% in FY2024, with the IMF projecting 2.7% growth for FY2025.
These improvements have been underpinned by fiscal reforms, currency stabilization measures, and a boost in remittances and exports under the IMF programme.
Government Welcomes Upgrade
Prime Minister Shehbaz Sharif hailed the Moody’s decision as a testament to Pakistan’s improving economic trajectory.
“The improved credit rating shows that economic policies are heading in the right direction,” he said.
Finance Minister Mohammed Aurangzeb echoed the sentiment, adding that the State Bank of Pakistan now has “room to cut” its key policy rate from the current 11%, should inflation remain under control.
Bond Markets Respond Positively
Pakistan’s international bonds rallied on the news, with prices climbing as much as 1 cent, trading between 90 and 100 cents on the dollar — their highest levels since early 2022. This marks a dramatic turnaround from mid-2022, when fears of a looming debt crisis sent bond prices plummeting to around 30 cents.
Analysts say the combination of IMF-backed stability and market-friendly policy signals has encouraged foreign investors to re-engage with Pakistani assets.
Debt Burden and Policy Challenges
Despite the positive momentum, Pakistan still faces daunting structural challenges.
- The country’s public debt reached a record $267 billion in May 2025, raising concerns about repayment capacity.
- Debt servicing costs remain among the highest globally, limiting fiscal flexibility for development spending.
- Political uncertainty and governance issues continue to pose risks to sustained investor confidence.
Adding to the complexity, the State Bank of Pakistan’s decision on July 30 to hold interest rates steady surprised market analysts who had anticipated a rate cut. The central bank cited rising energy prices as a potential upside risk to inflation, adopting a cautious stance ahead of its next monetary policy announcement on September 15.
Regional and Global Context
The rating upgrade aligns with a broader trend of emerging market recoveries supported by IMF programmes, as countries seek to stabilize post-pandemic and post-commodity-shock economies. For Pakistan, the IMF programme has been a critical anchor, ensuring access to external financing and enforcing policy discipline.
However, Moody’s stressed that sustained reforms — particularly in tax collection, energy sector restructuring, and governance improvements — are essential to prevent a reversal of gains. The agency warned that any derailment of the IMF programme or resurgence of political instability could quickly undermine the current stability.
Looking Ahead
While the latest upgrade is a vote of confidence, experts caution that Pakistan’s economic revival remains fragile. The path forward will depend on the government’s ability to:
- Maintain fiscal discipline under IMF guidelines.
- Manage external debt repayments without exhausting reserves.
- Navigate political turbulence ahead of upcoming elections.
- Shield the economy from global commodity price shocks.
With global financial conditions tightening and geopolitical uncertainties looming, Pakistan’s economic managers will need to balance growth ambitions with prudent macroeconomic management.
Bottom Line: Moody’s upgrade marks an important milestone in Pakistan’s recovery story, offering the potential for lower borrowing costs and renewed investor engagement. But with a heavy debt load, governance risks, and an unpredictable political climate, sustaining this momentum will require careful and consistent policy execution.
