Fitch upgrades Pakistan’s long-term foreign-currency issuer default rating

Investing.com -- Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ’B-’ from ’CCC+’, with a stable outlook, on April 15, 2025. The upgrade reflects Fitch’s increased confidence in Pakistan’s ability to sustain recent progress in narrowing budget deficits and implementing structural reforms.

Fitch expects Pakistan’s tight economic policy settings to continue supporting recovery of international reserves and containing external funding needs, despite lingering implementation risks and large financing needs. Global trade tensions and market volatility could create external pressures, but these risks are mitigated by lower oil prices and Pakistan’s low dependence on exports and market financing.

Pakistan and the International Monetary Fund (IMF) reached an agreement in March 2025 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 the third quarter of 2027. Pakistan has performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although tax revenue growth fell short of its indicative target.

Fitch forecasts the general government budget deficit to narrow to 6% of GDP in the fiscal year ending June 2025 and around 5% in the medium term, from nearly 7% in the previous fiscal year. The primary surplus is expected to more than double to over 2% of GDP in the fiscal year ending June 2025.

Government debt to GDP ratio declined to 67% in the fiscal year ending June 2024, from 75% in the previous fiscal year, and Fitch forecasts a gradual decline over the medium term. However, the debt ratio is still expected to tick up in the fiscal year ending June 2025 due to a rapid decline in inflation and will remain above the forecast ’B’ median of just over 50%.

Fitch expects Consumer Price Index (CPI) inflation to average 5% year on year in the fiscal year ending June 2025, from over 20% in the previous two fiscal years. The State Bank of Pakistan held its policy rate steady at 12% in March 2025, noting pressures on the current account and persistent core inflation. GDP growth is expected to edge up to 3% in the fiscal year ending June 2025.

Pakistan posted a current account surplus of $700 million in the first eight months of the fiscal year ending June 2025 due to surging remittances and favourable import prices. External deficits are expected to widen due to stronger domestic demand but should remain below 1% of GDP in the coming years.

The government will face about $9 billion in external debt maturities in the fiscal year ending June 2026 after over $8 billion in the previous fiscal year. The next international bond maturity is in September 2025. The authorities secured $4 billion in external financing in the first half of the fiscal year ending June 2025 and are expecting to obtain $10 billion in the second half, of which $4 billion would be from multilaterals and $5 billion from various commercial loans, mainly refinancing from Chinese banks.

Despite the progress, Pakistan still faces challenges, including a mixed record of IMF programme performance and increased frequency of security incidents along the border with Afghanistan and in the Balochistan province. Former prime minister Imran Khan, imprisoned since May 2023, remains highly popular, adding to the domestic political and economic fractures.

The country also has an Environmental, Social, and Governance (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, reflecting the high weight that the World Bank Governance Indicators have in Fitch’s proprietary Sovereign Rating Model.

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