Moody’s Upgrades Pakistan’s Sovereign Rating to B3
Global ratings agency Moody’s on Monday upgraded Pakistan’s sovereign credit rating to B3 from Caa1, maintaining a stable outlook. The agency cited improvements in governance, a stronger external position, and improving fiscal metrics as key drivers, according to a statement reported by Dawn and CNBC TV18.
Moody’s said in its announcement: “The upgrade to B3 reflects our expectations that improvements in governance will allow the government to sustain the recent improvements in the country’s external position and strengthen fiscal metrics.” The agency also noted that Pakistan’s external vulnerability risks have eased since its last rating action in August 2025, with foreign exchange reserves building steadily amid sustained macroeconomic stabilisation.
Key Drivers Behind the Upgrade
According to Moody’s, Pakistan’s foreign exchange reserves rose to about $17 billion at the end of July 2026, up from $14 billion a year earlier, enough to cover nearly three months of imports. The agency also highlighted that lower domestic financing costs following monetary easing and an improved fiscal position have driven a “material improvement” in Pakistan’s debt affordability.
Moody’s expects this improvement to be durable, stating: “We expect the recent improvement in Pakistan’s debt affordability to be durable, underpinned by sustained macroeconomic stability.” The agency further projected that reserves would rise to $19–20 billion by end of fiscal 2027 and $20–21 billion in fiscal 2028, subject to continued progress on the IMF-supported reform programme.
Remaining Vulnerabilities
Despite the upgrade, Moody’s cautioned that Pakistan’s credit profile remains vulnerable due to a structurally fragile external position, weak debt affordability, a narrow revenue base, and constraints on investment and high-productivity growth. These weaknesses are reflected in the B3 rating, the agency said.
Moody’s also flagged that Pakistan’s external financing needs are substantial — around $21 billion in fiscal 2027 and $30 billion in fiscal 2028, according to IMF estimates. Of these, about $7 billion and $12 billion respectively comprise existing bilateral deposits expected to be rolled over. The agency noted that while the projected reserve accumulation provides a larger buffer, the external position remains vulnerable to shocks.
Broader Rating Actions
The upgrade to B3 also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd. Moody’s raised Pakistan’s local and foreign currency country ceilings to B1 and B3, respectively, from B2 and Caa1. The agency explained the two-notch gap between the local currency ceiling and the sovereign rating by referencing the government’s relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk. The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness.
Context: S&P Global’s Prior Upgrade
The Moody’s action comes only a month after S&P Global Ratings upgraded Pakistan’s long-term sovereign credit rating to 'B' from 'B-', citing an improving external position and gradual macroeconomic stabilisation, with a stable outlook (as reported by Dawn).
India Comparison
In its coverage, CNBC TV18 highlighted that Moody’s has kept India’s sovereign rating at Baa3 with a stable outlook, last affirmed in April 2026. Pakistan’s B3 rating is below India’s investment-grade Baa3, reflecting the significant difference in the two countries’ sovereign credit profiles.
What a Sovereign Rating Means
A sovereign credit rating serves as an indicator of a country’s financial health for foreign investors. It assesses the risk involved in lending money to the country, evaluating its ability to repay debts. An upgrade gives global lenders greater confidence, helping the country attract foreign investment and borrow funds on better terms, as explained by Dawn.