Moody’s Investors Service has revised the outlook for Pakistan’s banking system from positive to stable. This adjustment reflects a gradual rather than rapid recovery in the nation’s operating environment. The agency highlights that while economic conditions are improving, deep-rooted challenges remain for the financial sector.
Real GDP is projected to grow by 3.5 percent in 2026. This marks a slight improvement from the 3.1 percent growth estimated for 2025. The shift in outlook underscores a cautious optimism regarding Pakistan’s ongoing fiscal reforms and external positioning.
Gradual Economic Growth and Forecasts
The pace of economic recovery in Pakistan is steady but remains slow. Moody’s analysis suggests that the country is moving past its worst financial hurdles. However, the speed of this improvement is not enough to maintain a positive outlook for the banking sector right now.
The agency emphasized the role of government reforms in this process. These reforms are crucial for rebuilding investor confidence. They are also vital for strengthening overall economic activity across the nation.
Here is a snapshot of the GDP projections provided by Moody’s:
| Year | Projected Real GDP Growth | Status |
|---|---|---|
| 2025 | 3.1% | Recovering |
| 2026 | 3.5% | Improving |
Growth is visibly trending upward. Yet the rating agency notes that the recovery is fragile. It relies heavily on political stability and the continuation of strict fiscal policies.
The external position of the country is strengthening. This means Pakistan is getting better at managing its foreign payments and currency reserves. This stability is a key pillar supporting the broader banking system.
Asset Quality and Profitability Risks
Pakistani banks are expected to face hurdles regarding the quality of their loans over the next year. Moody’s predicts that financial performance will remain stable but under pressure for the next 12 to 18 months. The primary concern lies in the ability of borrowers to repay debts.
High inflation in previous years has strained the repayment capacity of businesses and households. While inflation is cooling down, the lag effect continues to impact loan books. Banks will need to manage their bad loans carefully to maintain profitability.
Profit margins are also facing a squeeze. The central bank has initiated interest rate cuts to spur growth. When rates go down, the gap between what banks pay on deposits and earn on loans often shrinks.
“Margins will remain steady after a decline following rate cuts, but higher business volumes will support profits,” Moody’s noted in their report.
The agency believes that volume will compensate for lower margins. As the economy grows, more businesses will seek loans. This increased activity will generate non-interest income and help protect capital buffers.
Heavy Reliance On Government Debt
A major factor influencing the sector outlook is the deep connection between banks and the state. The outlook for the banking system is closely tied to the sovereign rating of the Pakistan government. The government currently holds a Caa1 rating with a stable outlook.
Banks in Pakistan invest heavily in government securities. These investments account for roughly half of the total assets in the banking sector. This creates a direct link between the health of the government and the health of the banks.
- High Exposure: Banks hold massive amounts of government debt.
- Risk Linkage: If the government faces financial stress, banks feel it immediately.
- Liquidity Concerns: High liquidity in these securities offers safety but also concentrates risk.
Pakistan’s long-term debt sustainability remains a point of uncertainty. The fiscal position is still weak despite recent improvements.
The country faces external vulnerability risks. This refers to the risk of not having enough foreign currency to meet international debt obligations. Moody’s pointed out that these macro-level risks prevent a more optimistic rating for the banks at this time.
Interest Rates and Credit Demand
The improved economic outlook has paved the way for easing monetary policy. Inflation has come down significantly from historic highs. This allows the central bank to lower borrowing costs for everyone.
Lower interest rates are good news for credit demand. Businesses are more likely to borrow money for expansion when loans are cheaper. This dynamic is expected to keep the problem loan ratios largely unchanged.
Lower borrowing costs will boost credit demand and safeguard capital buffers.
The operating environment is supported by this cycle of easing rates. It reduces the financial burden on existing borrowers. It also encourages new investment in the industrial and commercial sectors.
Moody’s expects that stable costs will further support bank profits. Banks have managed their operating expenses well during the crisis years. This discipline will serve them well as the economy transitions into a growth phase.
The banking system is safe but not yet thriving. The move to a stable outlook is a recognition of reality. It acknowledges progress while respecting the substantial risks that still exist in Pakistan’s economy.
