ISLAMABAD – Global credit rating agency Moody’s has revised Pakistan’s banking sector outlook from stable to positive, highlighting resilient financial performance and improving macroeconomic conditions. This upgrade aligns with the government’s own positive outlook, reflecting the sector’s significant exposure to sovereign risk through substantial holdings of government securities, which represent approximately half of total banking assets.
However, the agency warns that Pakistan’s long-term debt sustainability remains a concern due to its weak fiscal position and high vulnerability to liquidity and external risks. Economic growth projections have improved, with a forecasted 3% expansion in 2025, up from 2.5% in 2024 and a contraction of 0.2% in 2023. Inflation is expected to decrease significantly to around 8% in 2025, compared to an average of 23% in 2024.
Moody’s report indicates that problem loan formation should slow as borrowing costs and inflation decrease, despite a narrowing of net interest margins following interest rate cuts. Banks are expected to maintain adequate capital buffers supported by modest loan growth and solid cash generation.
The improved outlook is largely attributed to Pakistan’s enhanced government liquidity and a stronger external position compared to 2024. The 37-month $7 billion IMF Extended Fund Facility approved in September 2024 provides a credible source of external financing for the next few years.
Looking ahead, Moody’s projects GDP growth to reach 4% in 2026, driven by lower inflation and policy rate cuts, which are expected to spur private-sector spending and investment.
