Moody’s Ratings has revised Pakistan’s banking system outlook to stable from positive, signaling that financial stress has eased but recovery momentum remains limited. The agency stated that the operating environment is improving gradually as fiscal pressures soften and external accounts strengthen, yet deep-rooted challenges continue to restrain stronger growth across the sector.
According to Moody’s, banks are expected to maintain broadly stable financial performance over the next 12 to 18 months. However, asset quality concerns and profitability pressures persist despite easing policy rates and moderating inflation. While lower borrowing costs may support credit demand, margins are likely to remain under strain following recent interest rate cuts.
The ratings agency emphasized that Pakistan’s banking sector remains tightly linked to sovereign credit strength. Local banks continue to hold a substantial share of government securities, accounting for nearly half of total banking assets. As a result, the system remains highly sensitive to changes in fiscal conditions and public debt sustainability.
Economists described the outlook revision as a signal of stability rather than strength. Analysts noted that inflation has declined and remittance inflows have improved, supporting deposits, foreign exchange reserves, and short-term financial stability. Nevertheless, they cautioned that the broader recovery remains shallow and overly dependent on external inflows instead of domestic economic expansion.
Moody’s identified sovereign exposure as a core vulnerability, noting that banks’ holdings of government securities significantly exceed their equity levels. This structure limits balance sheet flexibility and discourages lending to the private sector. Consequently, credit intermediation remains constrained, slowing investment and job creation.
The agency forecast real GDP growth of around 3.5 percent in 2026, slightly higher than the previous year. While easing inflation and lower policy rates may encourage borrowing, experts warned that credit growth will remain uneven without structural reforms. Banks continue favoring low-risk sovereign assets over private lending, reinforcing a conservative financial model.
Analysts also pointed to persistent fiscal challenges, including a sizeable budget deficit and high interest payments relative to government revenues. Despite administrative reforms, spending pressures remain elevated, limiting the government’s ability to stimulate sustainable growth.
The outlook revision follows an earlier sovereign rating upgrade that reflected improving financial conditions under ongoing economic stabilization efforts. However, Moody’s clarified that the outlook change does not constitute a credit rating action. Overall, the stable outlook suggests reduced crisis risk but highlights the absence of strong growth drivers. Pakistan’s banking sector appears calmer, yet a durable and broad-based recovery remains elusive.
