Fitch Ratings on Monday upgraded Pakistan’s long-term foreign currency issuer default rating to ‘CCC+’ from ‘CCC,’ citing an easing of external funding risks, a new International Monetary Fund (IMF) program, ambitious proposed reforms, and a “strong” recent policy record.
In a statement, the U.S.-based agency said the upgrade reflected “greater certainty” over the continued availability of external funding following the inking of a staff-level agreement between Islamabad and the IMF for a 37-month $7 billion Extended Fund Facility. It said the temporary IMF arrangement that expired earlier this month had helped the country reduce fiscal deficits, and rebuild foreign exchange reserves, but noted large funding needs left it vulnerable if proposed reforms are not implemented.
On the new IMF program, the agency said it expected the lender’s Executive Board to approve a new SLA by the end of August, but noted this would require new funding assurances from bilateral partners, including Saudi Arabia, the U.A.E. and China. “We believe this will be achievable, given the strong past record of support and significant policy measures in the recent budget for the fiscal year ending June 2025 (FY25),” it added.
The ratings agency said the government was aiming to use the new Extended Fund Facility (EFF) to enact longstanding reforms in the tax system, energy sector and state-owned enterprises, including through higher taxes on the agricultural sector. It said its ratings upgrade also reflected a “strong recent policy record” stemming from the government raising taxes, cutting spending and raising utility tariffs over the past nine months. “The government also all but eliminated the gap between the interbank and parallel market exchange rates through a crackdown on the black market and regulation of exchange houses,” it said.
Fitch also forecast Pakistan’s current account deficit to remain relatively contained in the current fiscal thanks to tight financing conditions and subdued domestic demand. It noted that FX shortages had eased with the return of remittances to the official banking system, reversing their decline in 2022. However, it cautioned, the country’s funding needs required the repayment of $22 billion in external public debt this fiscal, of which $13 billion was likely to be rolled over.
The agency noted that reserves had recovered but remained low, adding it expected them to reach around $22 billion by the end of next fiscal year. It highlighted that half of the revenue efforts under the new EFF were frontloaded in the budget, adding forecasts projected a primary surplus of 0.8% of GDP and an overall fiscal deficit of 6.9% of GDP in FY25, improving to 1.3% of GDP and 6% of GDP, respectively, in FY26.
Fitch stressed on the rating being reliant on a challenging political situation, with a weak mandate for the incumbent government. It also cited implementation risks, noting a history of successive Pakistan governments often failing to implement or reversing the required reforms. “The current apparent consensus within Pakistan on the need for reform could weaken once economic and external conditions improve, although Pakistan now has fewer financing options than in the past,” it added.
The agency said it estimated government debt fell to 68% of GDP by end of the last fiscal year, from 75% at the end of FY23, due to high inflation and deflator effects. “We expect inflation and interest costs to decline in tandem, with economic growth and primary surpluses driving government debt/GDP gradually lower,” it said.
On factors that could lead to a downgraded rating, Fitch pointed to public Finances. “Renewed deterioration in external liquidity conditions that could result from delays in IMF program reviews, or indications that the authorities are considering debt restructuring,” it said. By contrast, an upgrade could result from sustained recovery in foreign-currency reserves and further significant easing of external financing risks, as well as the implementation of fiscal consolidation plans in line with IMF program commitments that lead to increased confidence in declining government debt.
In October 2022, Fitch had 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.