Fitch Upgrades Pakistan’s Rating to ‘B-’

Fitch Ratings has increased Pakistan’s long-term foreign-currency issuer default rating to ‘B-’ from ‘CCC+’. This decision reflects improvements in fiscal consolidation, a more stable external account, and enhanced macroeconomic policy management. The outlook for Pakistan is stable.

The ratings agency said the upgrade indicates a growing confidence in the nation’s ability to maintain strict budget controls and continue reforms under the current International Monetary Fund (IMF) program. This upgrade occurs as the country aims to build on its agreement with the IMF from March, which involved reviewing a $7 billion Extended Fund Facility and a new $1.3 billion Resilience and Sustainability Facility.

The agency anticipates that consistent economic policies will help to further increase international reserves and manage external funding needs. However, it also cautioned that significant financing requirements remain, and there are ongoing risks in implementing these policies.

The Finance Minister has welcomed this development, noting that the upgrade is a strong indicator of confidence in the country’s economic reforms and policies.

The country was previously in the B- category in July 2022, according to Topline Securities.

The finance minister stated that this upgrade will further reinforce the government’s economic agenda.

He added that this development is expected to lead to increased investment, trade, employment opportunities, industrial growth, and access to more financial resources.

He concluded that global rating agencies, investors, and financial institutions will likely have greater trust and confidence in the country moving forward.

The nation’s fiscal outlook has improved, with the budget deficit projected to decrease to 6.0% of GDP in FY25, from nearly 7.0% the previous year. This improvement is attributed to spending cuts and provincial surpluses. The primary surplus is expected to more than double, exceeding 2.0% of GDP.

Fitch highlighted that public debt levels have fallen to 67% of GDP in FY24 from 75% in the prior year, and a continued gradual decline is anticipated. However, interest costs remain high, with an expected interest-to-revenue ratio of 59% in FY25, significantly higher than the B median of 13%.

Inflation is expected to decrease to 5.0% in FY25, a significant drop from over 20% in the past two years, before increasing slightly to 8.0% in FY26. The State Bank of Pakistan (SBP) has maintained its policy rate at 22% following substantial monetary easing in 2024. Growth is projected to recover to 3.0% in FY25.

The country’s external position has stabilized, with a $700 million current account surplus in the first eight months of FY25, supported by increased remittances and lower import prices. Gross foreign exchange reserves reached nearly $18 billion in March, a substantial increase from under $8 billion in early 2023.

However, the nation faces external debt maturities of approximately $9 billion in FY26, following over $8 billion due this year. The government plans to secure an additional $10 billion in funding in the second half of FY25, mainly through multilateral and commercial channels.

On the political side, the current coalition government holds a parliamentary majority but lacks a strong public mandate. The agency noted that ongoing political tensions, institutional weaknesses, and security issues in areas near Afghanistan remain potential risks.

Fitch’s Sovereign Rating Model initially assigned the country a score equivalent to ‘CCC+’, but the rating committee increased it by one notch to reflect improvements in macroeconomic management and inflation control.