Moody’s, the global credit rating agency, has upgraded Pakistan’s banking sector outlook from ‘stable’ to ‘positive,’ citing improved economic conditions and resilience in financial performance. The agency’s statement highlighted the positive shift in Pakistan’s banking system, reflecting an improving macroeconomic environment compared to the challenges faced just a year ago.
According to Moody’s, the banking sector’s outlook aligns closely with Pakistan’s sovereign outlook, which has also been upgraded to ‘positive.’ The country’s banks hold significant government securities, comprising around 50 per cent of total banking assets, linking their credit strength directly to that of the government’s financial health.
Despite these improvements, Moody’s cautioned that long-term debt sustainability remains a significant challenge for Pakistan, due to the country’s fragile fiscal position and persistent external vulnerabilities.
Nevertheless, economic growth is expected to accelerate, with projections indicating a 3 per cent expansion in 2025, up from 2.5 per cent in 2024, and a recovery from the 0.2 per cent contraction in 2023. Inflation, which surged in previous years, is also expected to ease considerably, with forecasts suggesting a drop to 8 per cent in 2025, down from an average of 23 per cent in 2024.
Moody’s anticipates that banks will experience slower formation of problem loans as inflation and borrowing costs decline, although the narrowing of net interest margins is expected due to recent interest rate cuts.
These cuts, designed to stimulate economic activity, have already lowered the policy rate to 12 per cent. The agency noted that banks would maintain sufficient capital buffers, supported by stable loan growth and solid cash flows, despite continuing high dividend payouts.
The improved outlook is largely credited to Pakistan’s more favourable economic conditions and the enhanced liquidity and external financial positions. Pakistan’s 37-month, $7 billion Extended Fund Facility from the International Monetary Fund (IMF), approved in September 2024, has provided much-needed external financing, securing a stable path for the country’s economy over the coming years.
Looking ahead, Moody’s forecasts stronger GDP growth in Pakistan, with projections of 3 per cent in 2025 and 4 per cent in 2026. The agency expects this growth to be driven by the easing of monetary policy and a 10 per cent reduction in interest rates since mid-2024. With inflation expected to drop sharply, Moody’s anticipates increased private-sector spending and investment, which could further drive economic recovery.
