Pakistan has continued to make headway in restoring economic stability and rebuilding its external buffers, the Fitch Ratings said on Friday.
In a note, however, the global credit rating agency noted that progress on difficult structural reforms would be key to upcoming IMF program reviews and continued financing from other multilateral and bilateral lenders.
Referring to the State Bank of Pakistan’s decision to cut policy rates to 12% last month, it said this reflected the “taming” of consumer price inflation, which fell to around 2% year-on-year in January, down from an average of nearly 24% in fiscal year 2023-24. The rapid disinflation, it said, reflects fading base effects from earlier subsidy reforms and exchange rate stability, underpinned by a tight monetary policy stance, subduing domestic demand and external financing needs.
“Economic activity, having absorbed tighter policy settings, is now benefitting from stability and falling interest rates,” it said, adding an expectation for real value to expand by 3% in the current fiscal year. “Growth in credit to the private sector turned positive in real terms in October 2024 for the first time since June 2022,” it said.
Noting that the country had a current account surplus thanks to strong remittance inflows, robust agricultural exports and tight policy settings, it said foreign exchange market reforms in 2023 had also facilitated the shift. “When upgrading Pakistan’s rating to ‘CCC+’ in July 2024, we expected a slight widening of the current-account deficit in FY25,” it said.
On the country’s foreign reserves, Fitch expected them to outperform targets under the $7 billion IMF Extended Fund Facility and earlier forecasts. Gross official reserves reached over $18.3 billion by end-2024, about three months of current external payments, up from around $15.5 billion in June.
However, it warned, the reserves remain low relative to funding needs. “Over $22 billion of public external debt matures” in the ongoing fiscal, including nearly $13 billion in bilateral deposits that are likely to be rolled over by bilateral partners. Saudi Arabia rolled over $3 billion in December, and the U.A.E. $2 billion in January.
Fitch noted that new bilateral capital flows would likely be commercial and conditional on reforms, as in the government’s deal with Saudi Arabia on Reko Diq. “Pakistan and Saudi Arabia also recently agreed on a deferred oil payment facility,” it added.
“Securing sufficient external financing remains a challenge, considering large maturities and lenders’ existing exposures,” said Fitch, recalling authorities had budgeted for about $6 billion of funding from multilaterals this year, of which about $4 billion would effectively refinance existing debt. “A recently announced $20 billion 10-year framework with the World Bank Group appears broadly in line with this,” it said.
On fiscal reforms, the agency noted progress despite setbacks. “The primary fiscal surplus has outperformed IMF targets, although federal tax revenue grew less than required under the IMF’s indicative performance criterion in the first six months of FY25,” it said. All provinces had legislated higher agricultural income taxes—though missed the deadline imposed by the IMF, it added.
“In July, we noted that positive rating action could be driven by a sustained recovery in reserves and further significant easing of external financing risks, and/or implementation of fiscal consolidation in line with IMF commitments,” it said. However, any deteriorating external liquidity could lead to negative action, it added.