How $17 billion in forex reserves is strengthening Pakistan’s economy

Dubai: Pakistan’s foreign exchange reserves have climbed to about $17 billion, strengthening its ability to meet overseas payments and withstand external shocks as lower borrowing costs ease pressure on government finances.

The improvement prompted Moody’s Ratings to upgrade Pakistan’s local and foreign currency sovereign ratings to B3 from Caa1. The agency maintained a stable outlook, signalling that it expects the country’s improving credit position to hold despite remaining economic risks.

Reserves rose from $14 billion at the end of July 2025 to $17 billion at the end of July 2026. The current amount can cover nearly three months of imports, giving Pakistan a larger buffer against higher commodity prices, tighter global financing and other external pressures.

Moody’s said Pakistan’s credit profile was showing greater resilience than during previous economic cycles, including against the ongoing Middle East conflict. Higher reserves, a stable exchange rate and lower inflation have increased its capacity to absorb shocks.

Reserves expected to rise further

Moody’s expects reserves to reach between $19 billion and $20 billion by the end of fiscal 2027 and between $20 billion and $21 billion in fiscal 2028.

Those projections assume that Pakistan continues implementing its International Monetary Fund-backed reform programme. Progress under the programme supports financing from official partners and helps the country retain access to international debt markets.

Pakistan’s external vulnerability indicator, which compares debt coming due with available foreign exchange reserves, improved to about 145% in 2026 from 230% in 2025. While financing requirements remain large, the sharp decline shows that the gap between maturing debt and available reserves has narrowed.

Pakistan also met all its external obligations in fiscal 2026 while continuing to build reserves, Moody’s said.

The country has gradually returned to international debt markets. It raised $750 million through a three-year Eurobond in April 2026 and about $250 million through its first yuan-denominated Panda bond in May.

These bond issues, along with official financing and IMF support, have broadened Pakistan’s access to foreign currency. They also show that the government has regained some ability to raise funds from international investors.

Lower rates ease debt costs

The cost of servicing government debt has also fallen materially.

Interest payments absorbed about 35% of government revenue in fiscal 2026, down from 49% a year earlier. In practical terms, the government spent about 35 out of every 100 units of revenue on interest, compared with almost half of its revenue in the previous year.

The improvement followed a steep decline in inflation, which allowed Pakistan’s central bank to reduce interest rates. The policy rate stood at 11.5% in July 2026, well below the 22% peak maintained between June 2023 and May 2024.

This matters because domestic borrowing accounts for about two-thirds of total government debt. Lower interest rates reduce the cost of issuing new debt and refinancing existing obligations.

Moody’s expects the interest burden to remain broadly stable at about 35% of government revenue over the next one to two years. It could then improve gradually as fiscal consolidation reduces government debt and interest expenses.

Large financing needs remain manageable

Pakistan will still require about $21 billion in external financing in fiscal 2027 and around $30 billion in fiscal 2028, based on IMF estimates cited by Moody’s.

These figures include existing bilateral deposits of about $7 billion in fiscal 2027 and $12 billion in fiscal 2028. Moody’s expects those deposits to be rolled over, meaning partner countries would extend them rather than require immediate repayment.

Continued progress under the IMF programme would help Pakistan secure timely financing from official partners, meet its external obligations and add to reserves, the agency said.

The stable outlook reflects the possibility that Pakistan’s finances could improve faster than expected. It also accounts for continuing weaknesses, including a narrow government revenue base, low foreign direct investment, a small export base and heavy reliance on remittances and external financing.

High interest costs still limit the money available for healthcare, education, infrastructure and other public needs. Policy uncertainty and domestic and geopolitical risks also continue to restrict investment and higher-productivity growth.

Path to another upgrade

Pakistan could earn another rating upgrade if it builds reserves beyond Moody’s present forecasts and records a sustained improvement in debt affordability.

A stronger record of reform implementation, better access to official and commercial financing and further progress in collecting government revenue would support that outcome. A deeper reduction in the proportion of revenue spent on interest would also strengthen the country’s credit position.

Risks would increase if delays or withdrawals of support from multilateral and bilateral partners caused reserves to fall sharply. Political or social disruption that weakened policymaking or access to financing could also place pressure on the rating.

For now, the upgrade recognises measurable improvements in Pakistan’s ability to manage its debt and overseas payments. Rising reserves, lower domestic financing costs and continued access to official and market funding have given the economy a firmer buffer against external pressures.