Banking Sector
The global credit rating agency Moody’s has upgraded Pakistan’s banking outlook from stable to positive, citing improved macroeconomic conditions and the financial resilience of the country’s banking sector. This positive shift reflects growing confidence in Pakistan’s economic recovery from previously weak levels.
In its latest report, Moody’s stated, “We have changed our outlook on Pakistan’s banking system to positive from stable to reflect the banks’ resilient financial performance as well as improving macroeconomic conditions from very weak levels a year ago.”
The agency highlighted that Pakistan’s economy is on an upward trajectory, with GDP growth projected to reach 3% in 2025, up from 2.5% in 2024 and a recovery from the contraction of -0.2% recorded in 2023.
Inflation, which has been a major economic challenge, is also expected to decline significantly. Moody’s estimated that inflation will ease to around 8% in 2025, a sharp drop from the average of 23% recorded in 2024.
The reduction in inflation, along with expected policy rate cuts, is anticipated to encourage private-sector investment and consumer spending, further supporting economic growth.
The report also linked the improved banking outlook to the sovereign outlook of Pakistan, which was also revised to positive. Pakistani banks have significant exposure to government securities, which account for about 55% of total banking assets as of September 2024.
Given this large share of government securities in banks’ balance sheets, the financial health of the banking sector remains closely tied to the sovereign’s stability.
Despite these positive developments, Moody’s cautioned that Pakistan’s long-term debt sustainability remains a key risk due to its weak fiscal position, external vulnerabilities, and high liquidity concerns.
However, the agency noted that banks are expected to maintain adequate capital buffers, supported by steady cash generation and controlled loan growth, despite high dividend payouts.
Moody’s further emphasized that Pakistan’s economic recovery is being reinforced by an improving external position and better government liquidity compared to 2024. The country’s ongoing 37-month, $7 billion IMF Extended Fund Facility, which was approved in September 2024, provides a reliable source of external financing and fiscal support.
Looking ahead, GDP growth is projected to accelerate to 4% in 2026, supported by a 10-percentage-point reduction in interest rates since the beginning of the monetary policy easing cycle in June 2024.
However, the agency pointed out that problem loans have increased to 8.4% of total loans as of September 2024, up from 7.6% in the previous year. Nonetheless, overall loans still represent only 23% of total banking assets, indicating manageable risk levels within the sector.
Moody’s concluded that the outlook upgrade is primarily driven by an improved operating environment and stronger economic fundamentals, which, if sustained, could lead to further positive developments for Pakistan’s banking industry and overall financial stability.
