Following a protracted break, Pakistan’s economic situation seems to be rather promising. For example, Moody’s late August followed Fitch in raising the nation’s sovereign rating from Caa3 to Caa2, changing the perspective from stable to positive.

This rare ray of hope points to rising global faith in Pakistan’s capacity to solve its financial problems and provide the foundation for a stable economy. Moody’s improvement comes shortly before the anticipated acceptance of a $7 billion extended financial facility by the IMF. This is seen by analysts as evidence that once again Pakistan’s fiscal management is starting to be trusted by world organizations.

Moody’s late August followed Fitch in raising the sovereign rating of the nation from Caa3 to Caa2, changing the perspective from stable to positive.

The improvement has already had noticeable results; the currency has strengthened, amply demonstrating that foreign exchange availability still defines Pakistan’s key economic problems. Moody’s rebuilt confidence has also helped the stock market.

Moody’s recognition of Pakistan’s lower default risk is tempered, however, by the sober fact that interest payments would devour over half of government income over the next two to three years.

Nevertheless, Moody’s observation that the possibility of default has decreased rather than disappeared helps to moderate hysterical analogies to Sri Lanka’s current economic catastrophe. This improvement, according to some experts, puts Pakistan in a better position to rejoin foreign capital markets on more reasonable terms. The possible issuing of Eurobonds and “panda bonds” at reasonable rates might reduce borrowing costs, relieve debt-servicing pressure, and provide the much-needed fiscal space for economic recovery.

Although the anticipated IMF loan approval would provide some comfort, this won’t set off another wave of improvements. The respite in borrowing rates from international markets comes with a sour aftertaste for the typical Pakistani taxpayer: increased borrowing always results in more debt, and that load rests firmly on the taxpayer’s shoulders.

Interest payments would devour over half of government income over the next two to three years.

When a rating improvement reflected a strong economy rather than a dire need for improved borrowing conditions, which would be the real indicator of economic health. Like Fitch, Moody’s has highlighted the residual questions about Pakistan’s capacity to carry out required reforms.

The warning is justified especially given the coalition government headed by Prime Minister Shehbaz Sharif, established after the February elections. With a weak political mandate, the administration may find it difficult to carry out policies meant to increase taxes without sparking social disturbance. This unstable scenario might cause delays in or possibly the cancellation of important financial assistance from bilateral and multilateral partners.

Such hazards increase the uncertainty of investments Pakistan deals with. Possible delays in the execution of reform might compromise financial assistance from bilateral and multilateral partners, therefore increasing investment risks.

Pakistan has been locked in a vicious circle of debt for decades; its foreign debt currently amounts to a shockingly $130 billion. Add to the problem the increasing circular debt and capacity payments. Circular debt has skyrocketed to 2.636 trillion rupees, according to the Power Division of the Ministry of Energy, while capacity payments for the fiscal year 2024–25 are expected to reach 2.8 trillion rupees—above the military budget for the country. Driven by growing power prices, these payments are severely taxing Pakistanis’ daily lives as well as the country’s economy.

Foreign debt currently amounts to a shocking $130 billion.

A growth model fueled in proportional measure by consumption aggravates Pakistan’s economic problems even further. This model causes significant import increases as economic development starts up, hence widening the trade imbalance of the nation. Pakistan’s exports in 2024, despite strict government controls, were $30.65 billion while imports were $54.71 billion, therefore generating a trade imbalance of $24.06 billion.

Pakistan’s economic stability will remain unstable as long as the government battles to combine sustainable development with the demands of growing debt. Without major structural changes, the nation runs the danger of continuing the cycle of borrowing and economic instability, thus depriving little hope for the near future.

Pakistan’s economy is under great pressure while the government is stepping up initiatives to cover the retail and wholesale sectors with the tax network. As part of the agreed-upon changes with the IMF, this project has spurred extensive merchants’ demonstrations and strikes. Driven by the urgent necessity to raise the poor tax-to-GDP ratio to below 8.5%, the government’s determination seems strong despite opposition.

Circular debt has skyrocketed to 2.636 trillion rupees.

With a weak political mandate, the administration cannot afford to stray from the IMF’s recommended reforms, especially regarding measures of income-raising. Maintaining timely IMF evaluations, releasing necessary finance from external partners, and strengthening Pakistan’s foreign currency reserves depend on following these measures.

Pakistan’s economy still mostly depends on outside help even if it has achieved notable progress over the last year. This emphasizes how dangerous the road ahead is and how one mistake might compromise the delicate development so far attained.