Moody’s has upgraded Pakistan’s sovereign credit rating by one notch to B3 from Caa1, citing improvements in the country’s external position and fiscal metrics, while warning that weak governance, low investment and high financing needs continued to constrain its credit profile.

The rating agency retained a stable outlook but said international governance indicators continued to show weaknesses in the rule of law, control of corruption and government effectiveness.

Moody’s said the upgrade reflected expectations that improvements in governance would help the government sustain recent gains in the external position and strengthen fiscal performance.

However, it described Pakistan’s debt profile as weak because of a fragile external position, limited debt affordability and constraints on investment and economic growth.

The B3 rating remains highly speculative and is seven notches below investment grade. The upgrade therefore does not materially alter Pakistan’s underlying credit risks.

Prime Minister Shehbaz Sharif welcomed the decision and congratulated the nation on the improved ranking.

Moody’s said Pakistan’s external vulnerabilities had eased since its previous rating action in August 2025, with foreign exchange reserves rising amid macroeconomic stabilisation.

Interest payments also fell to about 35 percent of government revenue in fiscal 2026 from 49 percent in fiscal 2025, largely because lower inflation allowed the central bank to cut interest rates.

However, the agency said Pakistan’s external position remained structurally fragile because of its small export base, very low foreign direct investment inflows, reliance on remittances and continued dependence on official and commercial financing.

It projected foreign exchange reserves of about $20 billion by the end of the current fiscal year, at least $1 billion below the level understood to have been agreed with the International Monetary Fund.

Moody’s said continued adherence to the IMF programme would help Pakistan meet estimated external financing needs of about $21 billion in fiscal 2027 and $30 billion in fiscal 2028.

The agency also warned that weak debt affordability, a narrow revenue base and limited policy effectiveness would continue to restrict fiscal flexibility and the government’s ability to address social spending and infrastructure needs.

Moody’s said these structural weaknesses remained embedded in Pakistan’s B3 rating despite recent improvements.