Monitoring Desk
Global credit rating agency Moody’s has upgraded Pakistan’s banking sector outlook from stable to positive, citing improved financial performance and strengthening macroeconomic indicators. The shift reflects growing confidence in the country’s economic trajectory after a period of uncertainty.
“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,” Moody’s stated in its latest report.
Banking Sector Profits Surge Despite Weak Private Lending
Financial analysts attribute the banking sector’s strong profitability to the government’s aggressive borrowing at record-high interest rates of 22% or more during FY24. Despite limited lending to the private sector, banks have continued to generate substantial earnings through investments in government securities.
In 2023, major credit rating agencies had downgraded Pakistan’s economic outlook, preventing the country from accessing international financial markets to raise capital through Eurobonds. While these challenges remain, Finance Minister Mohammad Aurangzeb has engaged with top rating agencies in Washington to restore investor confidence in Pakistan’s economic reforms.
Economic Growth and Inflation Outlook
Moody’s projects Pakistan’s GDP growth at 3% for FY25, up from 2.5% in FY24 and a contraction of -0.2% in FY23. The State Bank of Pakistan (SBP) has also forecasted economic growth in the range of 2.5% to 3.5%.
The agency expects GDP growth to accelerate to 4% in 2026, supported by a cumulative 1,000 basis points cut in interest rates since the beginning of the monetary policy easing cycle in June 2024. Inflation is forecasted to decline sharply to 8% in 2025, down from an average of 23% in 2024, easing pressures on consumers and businesses.
Banking Stability and Sovereign Exposure
Moody’s highlighted that the positive banking sector outlook aligns with the improved sovereign credit outlook. Pakistani banks hold a significant portion of their assets in government securities, which accounted for 55% of total banking assets as of September 2024, linking their financial stability closely to the country’s fiscal health.
Despite some deterioration in asset quality—non-performing loans rising to 8.4% in September 2024 from 7.6% a year earlier—banks are expected to maintain sufficient capital buffers. Moody’s noted that stable cash flows, moderate loan growth, and sustained dividend payouts will support the banking sector’s resilience.
With macroeconomic conditions improving and financial sector stability strengthening, Pakistan’s banking industry is well-positioned for further growth, provided that economic reforms continue on a sustainable path.
