Moaaz Manzoor

Moody’s reaffirmation of Pakistan’s banking sector outlook as positive reflects improved financial stability, easing inflation, and GDP growth prospects, though fiscal constraints and high sovereign risk exposure remain key challenges, reports WealthPK.

Pakistan’s banking sector continues to strengthen as Moody’s recently upgraded its outlook to positive, citing improved macroeconomic stability. The policy rate remains 12%, balancing inflation control and growth, while IMF-backed reforms support external financing. However, fiscal constraints and high exposure to government securities remain areas of concern.

Speaking with WealthPK, Rao Asad, an economist at the Federation of Pakistan Chambers of Commerce & Industry (FPCCI), remarked that Pakistan’s improved credit rating was a reflection of strengthened external accounts and exchange rate stability. However, he warned that debt obligations remained a pressing challenge.

“Pakistan faces a total debt repayment of approximately $26 billion in FY25, with $22 billion in principal and $4.1 billion in interest,” he stated. “While rollovers may provide short-term relief, fiscal constraints remain apparent. The FBR is struggling with a tax collection shortfall of Rs606 billion (around $2.1 billion), indicating continued revenue constraints,” he added.

“While external support has stabilised liquidity, long-term fiscal sustainability remains a challenge.” Ali Najib, Head of Equity Sales at Insight Securities, explained that the continued positive outlook on the banking sector signaled growing investor confidence. “Easing inflation, GDP growth projections, and monetary policy consistency have reinforced financial stability,” he noted.

However, he pointed out that the banking sector’s exposure to government securities remained a structural vulnerability. “While reduced loan formation and strong capital buffers indicate financial strength, high sovereign risk exposure persists,” he said. He further noted that this improved outlook could encourage private-sector investment, enhance consumer spending, and lower borrowing costs.

“The financial sector’s role in sustaining economic momentum is becoming increasingly significant,” he added, warning that external risks and fiscal vulnerabilities could still pose challenges. Pakistan’s banking sector, heavily intertwined with sovereign credit conditions, has gradually improved due to prudent fiscal and monetary policies. Moody’s reaffirmation of Pakistan’s banking sector outlook as positive signals continued economic resilience, yet challenges remain.

While improved liquidity and investor confidence provide optimism, the country’s high debt burden and fiscal shortfalls demand immediate reforms. For long-term stability, Pakistan must broaden its tax base, strengthen fiscal management, and reduce reliance on external financing to ensure sustainable economic growth.

Credit: INP-WealthPk