Upgrade hinges on reforms

"Pakistan has been more resilient, more able to absorb this shock from the Middle East conflict this time around, compared to say in 2022, where there was an oil price shock," she said. She said lower inflation, stable exchange rates and higher foreign exchange reserves provided better shock absorption capacity.

Lim said three factors drove Moody's upgrade: improving governance, a stronger external position and better fiscal metrics. "We upgraded Pakistan's rating to reflect our expectation that the improvements in its governance will allow the government to sustain the recent strengthening of its external position and fiscal metrics," she said.

However, she cautioned that Pakistan's credit profile remained vulnerable. "Our B3 rating still incorporates credit constraints, a structurally fragile external position. It still has a small export base and limited foreign direct investment," Lim said.

She added that debt affordability, measured by the share of government revenue absorbed by interest payments, was improving but remained weak. Asked what could lead to a further upgrade, Lim pointed to sustained implementation rather than any single indicator, including rebuilding reserves, improved access to financing and fiscal reforms that meaningfully improved debt affordability.

Lim said revenue reforms over the past two years had already been factored into the upgrade. Further progress would be required for another rating improvement. In its rating upgrade, Moody's also said that the nation's debt profile remained weak due to a fragile external position and constraints on growth and investment.

International surveys continue to point to weak rule of law, limited control of corruption and limited government effectiveness.