Moody’s Upgrades Pakistan’s Banking Outlook Positively.

Moody’s Corporation has upgraded its outlook on Pakistan’s banking sector from stable to positive, pointing to stronger financial performance and improved economic conditions compared to last year. The agency noted that this shift aligns with the government’s positive outlook, as banks continue to hold significant sovereign exposure through government securities, making up nearly half of total banking assets.

While the outlook is encouraging, Moody’s highlighted ongoing concerns about Pakistan’s long-term debt sustainability, given its fiscal weaknesses and vulnerability to external risks. However, economic indicators are showing signs of improvement. Growth is expected to reach 3% in 2025, up from 2.5% this year, and inflation is projected to decline sharply to 8% from an average of 23% in 2024.

With lower borrowing costs and easing inflation, problem loan formation should slow, although net interest margins may narrow due to interest rate cuts. Despite these shifts, banks are expected to maintain sufficient capital buffers. Moody’s also emphasized the positive impact of the $7 billion IMF program approved in 2024, strengthening Pakistan’s external position. Looking ahead, GDP growth is forecasted to reach 4% by 2026, aided by lower interest rates and an improving business environment.