Global ratings agency Moody's cut Pakistan's sovereign credit rating by two notches to 'Caa3' on Tuesday amid international loan negotiations, saying the country's increasingly fragile liquidity "significantly raises default risks."

The cash-strapped country has been in talks with the International Monetary Fund (IMF) to secure a $1 billion loan, which has been pending since late last year over policy issues. It is part of a stalled $6.5 billion bailout package, originally approved in 2019.

A payment by the IMF may help to cover the South Asian country's immediate needs, Moody's said, but warned that "weak governance and heightened social risks impede Pakistan's ability to continually implement the range of policies that would secure large amounts of financing".

Islamabad has been undertaking key measures such as raising taxes, and removing blanket subsidies and artificial curbs on the exchange rate to secure the funds to avert an economic crisis.

The ratings agency also said that there is "very limited visibility" on Pakistan's sources of financing for its "sizeable external payments needs" beyond the life of the current IMF program that ends in June 2023.

Pushed to the brink by last year's devastating floods, Pakistan has reserves barely enough for three weeks of essential imports, while hotly contested elections are due by November.

A Reuters poll on Tuesday showed Pakistan's central bank may hike rates by 200 basis points in an off-cycle meeting this week to unlock the IMF funds.