Monitoring Desk
Global credit rating agency Moody’s has upgraded Pakistan’s banking sector outlook from stable to positive, citing resilient financial performance and improving macroeconomic conditions. This marks a shift from the economic uncertainty witnessed a year ago.
“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 Profits Surge Despite Limited Private Lending
Financial experts note that despite a sluggish private sector lending trend, banks have amassed substantial profits in recent years. The primary driver behind this growth has been the government’s aggressive borrowing at historically high interest rates of 22% or more during FY24.
In 2023, all major rating agencies downgraded Pakistan’s economic outlook, restricting the country from accessing international capital markets for issuing Eurobonds to raise dollars. While this challenge persists, Finance Minister Mohammad Aurangzeb has engaged with top rating agencies in Washington in an effort to restore confidence in Pakistan’s economic trajectory.
Economic Growth and Inflation Trends
Moody’s projects that Pakistan’s economy will grow by 3% in FY25, up from 2.5% in FY24 and a contraction of -0.2% in FY23. The State Bank of Pakistan has also forecasted GDP growth in the range of 2.5% to 3.5%.
The agency further predicts that Pakistan’s GDP growth will rise to 4% in 2026, supported by a cumulative 1,000 basis points cut in interest rates since the start of the monetary policy easing cycle in June 2024. Inflation is expected to decline sharply to 8% in 2025, down from an average of 23% in 2024.
Sovereign Exposure and Banking Stability
Moody’s highlighted that the positive banking outlook aligns with Pakistan’s improved sovereign credit outlook. Pakistani banks have a substantial exposure to government securities, which account for approximately half of their total banking assets. As of September 2024, government securities constituted 55% of banks’ total assets, linking their financial health closely to the state’s creditworthiness.
Despite some deterioration in asset quality—problem loans rising to 8.4% of total loans in September 2024 from 7.6% a year earlier—overall loans make up just 23% of banks’ total assets. Moody’s expects banks to maintain adequate capital buffers, supported by stable cash flows, moderate loan growth, and sustained dividend payouts.
With improving fiscal management and a more stable macroeconomic environment, the banking sector remains well-positioned for continued growth, provided that broader economic reforms stay on course.
