TAHIR AMIN
ISLAMABAD: Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “B-” from “CCC+”, citing fiscal consolidation and external stabilisation.
The rating agency stated that the outlook is stable.
“The upgrade reflects Fitch’s increased confidence that Pakistan will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its International Monetary Fund (IMF) programme performance and funding availability. We also expect tight economic policy settings to continue to support recovery of international reserves and contain external funding needs, although implementation risks remain and financing needs are still large. Global trade tensions and market volatility could create external pressures, but risks are mitigated by lower oil prices and Pakistan’s low dependence on exports and market financing”, the rating agency added.
Fitch rating agency stated that Pakistan and the IMF reached a staff-level agreement in March on the first review of the country’s $7 billion Extended Fund Facility and a new $1.3 billion Resilience and Sustainability Facility, both set to last until 3Q27. Pakistan performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although tax revenue growth fell short of its indicative target. Provincial governments have also legislated increases in agricultural income tax, a key structural benchmark. This follows Pakistan’s strong performance on its previous, more temporary arrangement, which expired in April 2024.
“We forecast the general government budget deficit to narrow to six percent of GDP in the fiscal year ending June 2025 (fiscal year 2025) and around five percent in the medium term, from nearly seven percent in fiscal year 2024. Our fiscal year 2025 forecast is conservative. We expect the primary surplus to more than double to over 2per cent of GDP in fiscal year 2025. Shortfalls in tax revenue, in part due to lower-than-expected inflation and imports, will be offset by lower spending and wider provincial surpluses. The lagged effects of high domestic interest rates in recent years still weigh on fiscal performance, but also drove the State Bank of Pakistan’s (SBP) extraordinary dividend of 2per cent of GDP to the government in fiscal year 2025”, it added.
The rating agency further noted that government debt/GDP dropped to 67per cent in fiscal year 2024, from 75per cent in fiscal year 2023, and forecast a gradual decline over the medium term, reflecting tight fiscal policy, nominal growth and a repricing of domestic debt at lower rates. The debt ratio will still tick up in fiscal year 2025 due to a rapid decline in inflation and will remain above the forecast ‘B’ median of just over 50per cent. The interest payment/revenue ratio, which we forecast at 59per cent in fiscal year 2025, will narrow, but remain well above the ‘B’ median of about 13per cent, given a high share of domestic debt and a narrow revenue base.
“We expect Consumer Price Index inflation to average 5per centyoy in fiscal year 2025, from over 20per cent in fiscal year 2023-24, on fading base effects from several rounds of energy price reforms, before picking up again to 8per cent in fiscal year 2026, in line with urban core inflation over the past few months. The SBP held its policy rate steady at 12per cent in March, noting pressures on the current account (CA) and persistent core inflation, after 1,000bp of rate cuts between May 2024 and January 2025. We expect GDP growth to edge up to 3per cent in fiscal year 2025,” Fitch ratings added.
The agency stated that Pakistan posted a CA surplus of $700 million in 8 months of fiscal year 2025 on surging remittances and favourable import prices. Imports picked up in early 2025 and we expect external deficits to widen from our forecast of a broadly balanced position for fiscal year 2025 on stronger domestic demand. Nevertheless, they should remain below 1per cent of GDP in the coming years. We think some informal FX demand management persists after the loosening exchange rate and import controls, and market reforms in 2023.
Fitch ratings warned that international trade tensions could hurt Pakistan’s goods exports, with exports to the US, mostly textiles, accounting for 3per cent of GDP (35per cent of the total) in fiscal year 2024. Lower commodity import prices could soften the blow on the trade balance. Remittances, Pakistan’s main source of external receipts, mostly come from the Middle East and tend to be resilient to the economic cycle. Pakistan has become less reliant on market and commercial financing in recent years, but market turmoil could still reduce access to loan funding.
“We expect a further buildup of gross reserves after the SBP’s purchase of FX in the interbank market brought them to just under $18 billion in March 2025 (about three months of external payments), from about $15 billion at fiscal year 2024 and a low of less than $8 billion in early 2023. Measures of net FX reserves are much lower, reflecting FX reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP. Nevertheless, we still view gross reserves as the most relevant indicator of Pakistan’s external liquidity”, it added.
It further noted that the government will face about $9 billion in external debt maturities in fiscal year 2026 after over $8 billion in fiscal year 2025 (nearly $5 billion in 2HFY25). Both figures exclude $13 billion in bilateral deposits and loans that are regularly rolled over, of which $4 billion is at the SBP. The next international bond maturity is in September 2025. Besides bilateral rollovers, the authorities secured $4 billion in external financing in 1HFY25 from a mix of multilateral and commercial sources and are expecting to obtain $10 billion in 2HFY25, of which $4 billion would be from multilaterals and USD5 billion from various commercial loans, mainly refinancing from Chinese banks.
“Prime Minister Shehbaz Sharif’s PMLN party and its allies received a mandate that was weaker than we expected in elections in early 2024, although they still have a constitutional majority in the National Assembly and are backed by the country’s influential military. Former prime minister Imran Khan, imprisoned since May 2023, remains highly popular. Domestic political and economic fractures are compounded by the increased frequency of security incidents along the border with Afghanistan and in the Balochistan province”, the rating agency added.
Governments from across the political spectrum in Pakistan have had a mixed record of IMF programme performance, often failing to implement or reversing the required reforms. The current apparent consensus within Pakistan on the need for reform could weaken over time. Technical challenges will also be significant, it added.
Pakistan has an ESG Relevance Score of ‘5’ for both political stability and rights and for the rule of law, institutional and regulatory quality and control of corruption, as is the case for all sovereigns.
These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Pakistan has a WBGI ranking at the 22nd per centile, the rating agency added.
