Moody’s Ratings (Moody’s) Wednesday upgraded the government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3.

“We have also upgraded the rating for the senior unsecured MTN programme to (P)Caa2 from (P)Caa3. Concurrently, the outlook for Government of Pakistan is changed to positive from stable. Accordingly, Pakistan’s default risk has reduced to a level consistent with a Caa2 rating,” read the statement.

The global credit rating agency, which downgraded Pakistan in February 2023, said that “there is now greater certainty on Pakistan’s sources of external financing, following the sovereign’s staff-level agreement with the International Monetary Fund (IMF) on 12 July 2024 for a 37-month Extended Fund Facility (EFF) of $7 billion”.

“We expect the IMF Board to approve the EFF in the next few weeks. Pakistan’s foreign exchange reserves have about doubled since June 2023, although they remain below what is required to meet its external financing needs,” the statement reads.

“The country remains reliant on timely financing from official partners to meet its external debt obligations fully,” it said.

Pakistan’s Caa2 rating continues to reflect the country’s “very weak debt affordability, which drives high debt sustainability risk, the statement reads.

“We expect interest payments to continue absorbing about half of government revenue over the two to three years.”

It said the Caa2 rating also incorporates the country’s weak governance and high political uncertainty.

On the other hand, the positive outlook reflects a balance of risks skewed to the upside. It captures the possibility that the government is able further to lower its government liquidity and external vulnerability risks, and achieve a better fiscal position than we currently expect, supported by the IMF programme, said the credit rating agency.

“Sustained reform implementation, including revenue-raising measures, can increase the government revenue base and improve Pakistan’s debt affordability,” it said.

Moreover, a record of completing IMF reviews on a timely manner would also allow Pakistan to continually unlock financing from official partners, sufficient to meet its external debt obligations and support further rebuilding of its foreign exchange reserves, it said.

Moody’s Wednesday said the upgrade to Caa2 from Caa3 rating also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd.

“The outlook for the Pakistan Global Sukuk Programme Co Ltd is positive. We have also raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively,” the statement reads.