Moody’s upgrades Pakistan’s banking sector outlook to positive

Moody’s, a global credit rating agency, has revised Pakistan’s banking sector outlook from stable to positive, attributing the change to stronger financial performance and a recovery in macroeconomic conditions from last year’s downturn.

The agency's latest report noted that Pakistan's banks are heavily invested in government securities, holding around 50% of their total assets in sovereign bonds. The upgrade reflects a more favorable liquidity position and improved external financing conditions, in line with the government's positive credit rating trend.

According to Moody’s, the outlook upgrade aligns with the improved sovereign credit rating of Pakistan as banks remain highly exposed to government risk through their substantial holdings of sovereign debt.

The agency noted that the country’s fiscal and monetary measures, coupled with an International Monetary Fund (IMF) programme, have helped stabilise its economy.

Pakistan’s economy has shown signs of recovery, with Moody’s forecasting a GDP growth rate of 3% for 2025, up from 2.5% in 2024 and a contraction of 0.2% in 2023.

Inflation, which had surged to an average of 23% in 2024, is expected to ease significantly to around 8% in 2025.

The rating agency highlighted that the 37-month, $7 billion IMF Extended Fund Facility, approved in September 2024, has provided a crucial buffer for Pakistan’s external financing needs. This, along with policy reforms, has improved investor confidence and stabilised the financial sector.

Despite the upgrade, Moody’s warned that risks remain, particularly regarding Pakistan’s high dependency on external funding, fiscal discipline, and political stability. The banking sector’s exposure to government securities also poses a risk in case of any sovereign distress.

Financial experts believe that while the positive outlook is a step forward, sustainable economic growth will require structural reforms, including improvements in tax collection, governance, and foreign direct investment.

Moody's Investors Service has periodically adjusted Pakistan's credit rating in response to the country's evolving economic landscape. In October 2022, the agency downgraded Pakistan's sovereign credit rating from B3 to Caa1, highlighting increased government liquidity and external vulnerability risks, which were exacerbated by devastating floods that severely impacted the economy.

The situation further deteriorated by March 2023, leading Moody's to lower the rating to Caa3. This decision was driven by a fragile liquidity position and critically low foreign exchange reserves, raising concerns about Pakistan's ability to meet its 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 a $7 billion IMF Extended Fund Facility, which bolstered the country's external financing prospects.