Islamabad:
Moody’s on Wednesday improved Pakistan’s credit qualification to Caa1’s speculative degree, lifting it from the edge of breach, and pointed out that, although the affordability of the debt has improved, it remains the weakest among the companions.
The qualification agency, one of the first three in the world, raised the position of Pakistan for the first time in a year and assigned a “stable” perspective, citing general improvements in the external and fiscal positions of the country. Pakistan had had a serious risk of non -compliance less than two years ago.
The global credit qualification agency has recognized the efforts made in the past for a year and a half to stabilize the economy.
“Moody’s ratings has improved the local and foreign issuer of the Pakistan government and the debt ratings for CAA1 from CAA2,” reads the announcement.
Pakistan remains at least one notch below the minimum degree of investment that the government needs to issue international sovereign bonds to competitive rates. The government is still unable to float these bonds due to the most risky credit grades that often lead to two -digit interest rates.
Moody’s also warned about the “fragile” position of foreign exchange reserves despite the improvements due to the highest payments of external debt, estimated at $ 50 billion for two fiscal years.
“Pakistan’s external position is still fragile. Its foreign exchange reserves remain well below what is required to fulfill their external debt obligations, underlining the importance of constant progress with the IMF program to continually unlock financing,” he added.
Moody’s has estimated the external financing needs of Pakistan at approximately $ 24-25 billion in this fiscal year and similar amounts again for the next fiscal year 2026-27, which raises the total needs to $ 50 billion.
The greatest reimbursements of the external debt keep the Ministry of Finance in a narrow position, which remains occupied throughout the fiscal year to refinance old loans. The Ministry has played an important role to guarantee an appearance of fiscal prudence despite the competitive demands of additional budgets.
The qualification agency said that the update to CAA1 reflected the improvement of Pakistan’s external position, backed by its progress in the implementation of the reform under the IMF program. It is likely that currency reserves continue to improve, although Pakistan will continue to depend on the timely financing of the official partners, he added.
Moody’s said he expects more gradual improvements as progress in the implementation of the reform under the IMF program supports the financing of bilateral and multilateral partners, but said that currency reserves remain “fragile (in) fragile levels.”
He sees no interruption in Pakistan’s external debt payments over the next few years.
While commenting on the fiscal situation, Moody’s said that Pakistan’s fiscal position was also strengthening from very weak levels, backed by an expanding tax base.
The “debt affordableness has improved, but is still one of the weakest among qualified sovereigns,” he added.
Moody’s said the country’s general budget deficits narrowed and that the main surpluses were expanding. The affordability of government debt was also improving, although it is still one of the weakest among our qualified sovereigns.
But he warned that there are still risks of delays in the implementation of the reform required to ensure timely financing, which in turn would weaken Pakistan’s external position again.
Strengthen the fiscal position
The qualification agency said the government has strengthened its collection of income through a combination of better application and new fiscal measures. Total income increased to approximately 16% of GDP in the last fiscal year from 12.6%, led by a large increase in fiscal income, which amounted to approximately 2% of GDP.
Government -free income also increased abruptly due to an extraordinary unique dividend of the State Bank of Pakistan.
Fiscal income has been estimated to resume in another half percentage of PIB percentage points in this fiscal year, but said that a decrease in SBP dividends will lead to a general narrowing of government income at approximately 15-15.5% of GDP.
The qualification agency said that the Government faced a significant challenge to continually implement income increase measures without triggering social tensions.
I expected the government to maintain control over expenses “, even when budgeted defense spending has increased” after the war with India. The government has gradually reduced subsidies to the electricity sector together with progress with the reforms of the energy sector.
When commenting on the debt position, the qualification agency said that debt service costs are also reduced due to the decrease in national interest rates in conjunction with lower policy rates.
“In general, we hope that the fiscal deficit is limited more to 4.5-5% of GDP in this fiscal year.” In the last fiscal year, the government deficit was 5.4% of GDP, which was better than the goal.
Due to the reduction in interest rates, interest payments would amount to approximately 40-45% of income in this and next fiscal year, which is a marked decrease of approximately 60% in fiscal year 2024. But the qualification agency said that interest payments were very high internationally and a key credit restriction.
He warned that there is still a risk of sliding in the implementation or results of the reform, which leads to delays or withdrawing the financial support of the official partners. This could cause renewed deterioration of materials in the external position of the sovereign, he added.
