Islamabad:
Moody’s on Wednesday improved the Pakistan credit note to the CAA1 speculative note, the lifting of the default, and noted that if the affordability of the debt has improved, it remains the lowest among peers.
The rating agency – One of the first three in the world – increased Pakistan’s position for the first time in a year and has awarded a “stable” perspective, citing global improvements in the country’s external and budgetary positions. Pakistan had been seriously risky in default less than two years ago.
The global credit rating agency has recognized the efforts that the government has made over the past over a year and a half to stabilize the economy.
“Moody’s NATINGS has improved the local and foreign currency issuer of the Pakistani government and notes of debt guaranteed from CAA1 to CAA1”, reads the announcement.
Pakistan still remains at least one notch lower than the minimum note that the government needs to issue international sovereign obligations at competitive prices. The government remains unable to float these obligations due to more risky credit ratings which often lead to two -digit interest rates.
Moody’s also warned of the “fragile” position of exchange reserves despite improvements due to higher external debt repayments, estimated at 50 billion dollars for two exercises.
“The external position of Pakistan remains fragile. Its exchange reserves remain much lower than what is necessary to comply with its external obligations, stressing the importance of stable progress with the IMF program to continually unlock funding,” he added.
Moody’s estimated Pakistan’s external financing needs at around $ 24 to 25 billion for this exercise and similar amounts again for the next fiscal 2026-27, bringing the total needs to $ 50 billion.
The reimbursements of the higher external debt maintain the Ministry of Finance in a tight position, which remains occupied throughout the financial year to obtain old loans refined. The ministry played an important role in the guarantee of a semblance of budgetary prudence despite competing requests for additional budgets.
The rating agency said that upgrading to CAA1 reflected the external position improving Pakistan, supported by its progress in the implementation of the reform within the framework of the IMF program. The exchange reserves should continue to improve, although Pakistan will remain dependent on the official financing of official partners, he added.
Moody’s said that he expects new gradual improvements as progress in the implementation of the reform within the framework of the IMF program, supporting the financing of bilateral and multilateral partners, but said that exchange reserves remain “still (at) fragile levels”.
He does not see any disruption in the reimbursements of the external debt of Pakistan for the next few years.
While commenting on the budgetary situation, Moody’s said that Pakistan’s budgetary position was also reinforced with very low levels, supported by an expanding tax base.
“The affordability of the debt has improved, but remains one of the weakest among the noted sovereigns,” he added.
Moody’s said that the country’s overall budgetary deficits were shrinking and that the primary surpluses were widened. The affordability of public debt also improved, although it remains one of the weakest among our noted sovereigns.
But he warned that there are risks of delays in the implementation of the reform necessary to obtain official funding in a timely manner, which would in turn weaken the external position of Pakistan.
Strengthening the budgetary position
The rating agency said the government had strengthened its income collection thanks to a combination of better application and new tax measures. Total income reached around 16% of GDP in the last financial year, compared to 12.6%, led by a sharp increase in tax revenue, or around 2% of GDP.
Government non -tax revenues have also increased due to a single extraordinary dividend from Pakistan State Bank.
He estimated that tax revenues to accelerate another half-point of GDP during this financial year, but said that a drop in SBP dividends will result in a global narrowing of government income to around 15 to 5.5% of GDP.
The rating agency said the government faced an important challenge to continually implement income reduction measures without triggering social tensions.
He hoped that the Government would retain control of spending, “even if the budgeted defense expenses increased” after the war with India. The Government has gradually reduced subsidies to the energy sector in parallel with progress with energy sector reforms.
While commenting on the debt position, the rating agency said that debt service fees are also reduced due to the drop in tandem internal interest rates with lower policy rates.
“Overall, we expect the budget deficit to decrease further to 4.5 to 5% of GDP during this exercise.” During the last financial year, the government’s deficit was 5.4% of GDP, which was better than the objective.
Due to the reduction in interest rates, interest payments would represent approximately 40 to 45% of income during this financial year and the next financial year, which represents a marked drop of around 60% during the 2010 financial year. But the rating agency said that interest payments were very high on an international level and a key credit constraint.
He warned that there remains a risk of slipping in the implementation of the reform or the results, resulting in delays or withdrawing support from the financing of official partners. This could in turn lead to a renewed deterioration of materials in the external position of the sovereign, he added.
