EDITORIAL: Moody’s has changed the banking outlook for Pakistan from positive to stable, generating intense debate as to whether this is an upgrade or a downgrade.
As per the rating agency, it assigns outlook, a forecast based on an assessment of on-ground reality as well as the impact of any recent policy changes, on the likely direction of a credit rating in the medium term — an outlook that falls into four categories; notably, positive, negative, stable and developing.
Stable implies little likelihood of a rating change in the medium term, while negative, positive or developing indicate relatively higher likelihood of change in the medium term.
Given this description, it is little wonder that government supporters are viewing the change in outlook as an upgrade while several analysts regard this as a downgrade as the likelihood of change is little — a change in rating that is hoped to be upwards but could well be downwards.
Moody’s in its report referred to local banks’ exposure to government securities as very high, around half of the banking assets and approximately 9.4 times their equity, which keeps the system highly sensitive to government credit. It is relevant to note that the 26 January 2026 decision of the Monetary Policy Committee (MPC) left the policy rate unchanged at 10.5 percent (a rate double that of regional competitors) in spite of a consumer price index of 5.6 percent in December 2024 year on year — a policy rate seen as continuing a contractionary monetary policy with obvious negative repercussions on the country’s growth rate. This decision was no doubt taken after the required consultations with the International Monetary Fund (IMF) — a prerequisite under the ongoing USD 7 billion Extended Fund Facility programme.
In response to a clamour to reduce the policy rate by large-scale manufacturing industry in general and exporters in particular on the grounds that contractionary policies were leading to factory closures and most units were operating at well below capacity, the MPC announced a reduction in the average Cash Reserve Requirement from 6 to 5 percent, and the daily minimum requirement from 4 to 3 percent — an expansionary policy that it was hoped would increase private sector as opposed to government credit. It is so far not clear as to whether changes in CRR will improve industrial outlook though exchanges between the authorities and LSM sector continue followed by the government recently announcing a range of unbudgeted incentives.
The May 2025 first review IMF documents noted that “completing the process of addressing undercapitalised financial institutions is essential, with the SBP exercising its powers as needed under the upgraded resolution framework.
The remaining Safeguards Assessment recommendations—clarifying the prohibition on quasi-fiscal activities in legislation and filling SBP senior management positions—should also be implemented quickly, while clarity around anticipated changes in the post-2027 regulatory and institutional framework would help ensure a smooth transition.” And the second review documents dated December 2025 urge the SBP to “further strengthen its communication and analytical underpinnings of the monetary policy framework, including the MPC’s reaction function, and provide a clearer assessment of the policy stance to anchor longer-run expectations in the face of high uncertainty.” These observations without doubt show that while the IMF’s comfort level with respect to an appropriately tight discount rate is high as it indicates a positive rate yet the government’s reliance on credit remains a source of serious concern, which surely must be compounded by the over-exposure of banks to the power sector. It may be recalled that the banks were recently compelled to release 1.25 trillion rupees as credit to retire a major portion of its energy sector circular debt whose interest payments are to be passed onto the consumers while the source of the debt, appalling poor performance of the sector, has not been effectively tackled.
To conclude, productive units and the general public have the innate capacity to make their own assessments especially in the event that their assessment deviates sharply from those presented by the stakeholders.
Trust deficit must therefore be minimised and care taken to ensure that the generation of a favourable general perception that can jumpstart a stagnant economy remains firmly rooted in realism.
Copyright Business Recorder, 2026
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