Moody's recognises improvements to Pakistan's banking sector

International rating agency Moody’s has recognised improvements in the performance of Pakistan’s banking sector. The sector has displayed signs of progress over the past year after conditions in the wider economy weakened the sector.

As per reports, the rating agency has promoted the banking outlook in Pakistan from ‘stable’ to ‘positive’. Seemingly inconsequential at first glance, this change in ratings could prove beneficial to Pakistan’s economy.

According to a statement from Moody’s, the rating agency made the change after noting the strong financial performance of Pakistani banks alongside improvements in Pakistan’s macroeconomic indicators. Banks were able to record robust growth rates because of sky-high interest rates, which sat at 22 percent over Fiscal Year (FY) 2023-24.

However, lending to the private sector remained abysmally low. Analysts and experts alike have outlined how commercial banks refrained from extending credit to the private sector in a way that some could describe as systematic.

With the private sector ‘systematically’ locked out of receiving loans, government borrowings from banks are responsible for the large profits banks have enjoyed over the past few years.

In 2023, all top rating agencies unanimously demoted Pakistan’s economic outlook, which resulted in the country being locked out of receiving credit from international sources. As per credible reports, this caused Pakistan to lose the right to ‘launch Eurobonds to raise dollars’.

While this restriction has still not been lifted, some believe that the situation could soon change once other rating agencies reconsider Pakistan’s status. Finance Minister Muhammad Aurangzeb recently collaborated with agencies in the United States to discuss Pakistan’s development.

According to reports, Moody’s has outlined the riskiness of Pakistan’s debt holdings, highlighting how it may be tough to sustain such a debt burden. Moreover, the agency also brought up the country’s fiscal position, which is currently weak.

Despite Pakistan’s persisting macroeconomic hurdles, Moody’s believes that the local economy is set to grow by a respectable three percent over FY 2024-25. This figure, while low, is a stark improvement from the growth rate Pakistan has experienced over the past two years.

For reference, the growth rate in 2024 reportedly sat at 2.5 percent, whereas the economy actually shrank by 0.2 percent in 2023. Analysts believe Moody’s projected figures are in line with Pakistan’s growth trajectory as the State Bank of Pakistan (SBP) has also estimated the GDP growth rate to sit in the ballpark of 2.5 to 3.5 percent.

The economy started showing signs of revival after June 2024 as the SBP began slashing interest rates then - which have fallen by 1000 basis points till now.