The Fitch Ratings service on Tuesday upgraded Pakistan’s long-term foreign-currency issuer default rating to ‘B-‘ from ‘CCC+,’ adding that the country’s economic outlook is now stable.
In a statement, the U.S.-based global credit rating agency said the upgrade reflected an increased confidence that the country will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its IMF program 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,” it said. Acknowledging external pressures from global trade tensions and market volatility, it said the risks were mitigated by lower oil prices and Pakistan’s low dependence on exports and market financing.
Referring to Pakistan and IMF inking a staff-level agreement in March on the first review of an ongoing $7 billion Extended Fund Facility, as well as a new $1.3 billion Resilience and Sustainability Facility, it said the country had performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus. However, it noted, 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,” it said, referring to the 2023 $3 billion Stand-by Arrangement.
“We forecast the general government budget deficit to narrow to 6% of GDP in the fiscal year ending June 2025 (FY25) and around 5% in the medium term, from nearly 7% in FY24,” it said, noting the forecast for the ongoing fiscal year remained conservative.
“We expect the primary surplus to more than double to over 2% of GDP in FY25,” it said, adding tax revenue shortfalls, partly caused by lower-than-expected inflation and imports, would 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 extraordinary dividend of 2% of GDP to the government in FY25,” it added.
Fitch said it expected CPI inflation to average 5% year-on-year in FY25, before picking up again to 8% in FY26. It also said it expected GDP growth to edge up to 3% in FY25.
In October 2022, Fitch had initially downgraded Pakistan’s credit rating to ‘B-‘ from ‘CCC+.’ This was followed by another downgrade to ‘CCC-‘ in February 2023. Later, in July 2023, the agency had upgraded Pakistan’s rating from ‘CCC-‘ to ‘CCC’ after Islamabad secured a fresh bailout from the IMF. In July 2024, this was upgraded to ‘CCC+’.
The agency said it expected Pakistan’s foreign exchange reserves to continue growing, describing them as the most relevant indicator of Pakistan’s external liquidity. However, it noted that funding needs remained “large.”
It said the rating could be downgraded once more if government debt and debt-servicing metrics cannot be kept on a firm downward path. Another deterioration in external liquidity conditions could also hamper the rating. However, the rating could improve further if the country posts significant declines in government debt and debt-servicing burdens and exhibits further significant easing of external financing risks.