Hong Kong April 15 2025: Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘CCC+’. The Outlook is Stable.
The upgrade reflects Fitch’s increased confidence that Pakistan will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its IMF programme 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. Global trade tensions and market volatility could create external pressures, but risks are mitigated by lower oil prices and Pakistan’s low dependence on exports and market financing.
Policy Credibility Gradually Rebuilt: Pakistan and the IMF reached a staff-level agreement in March on the first review of the country’s USD7 billion Extended Fund Facility and a new USD1.3 billion Resilience and Sustainability Facility, both set to last until 3Q27. Pakistan performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although 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.
Fiscal Performance Improving: 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. Our FY25 forecast is conservative. We expect the primary surplus to more than double to over 2% of GDP in FY25. Shortfalls in tax revenue, in part due to lower-than-expected inflation and imports, will 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 (SBP) extraordinary dividend of 2% of GDP to the government in FY25.
Downward Debt Trajectory: Government debt/GDP dropped to 67% in FY24, from 75% in FY23, and we forecast a gradual decline over the medium term, reflecting tight fiscal policy, nominal growth and a repricing of domestic debt at lower rates. Nevertheless, the debt ratio will still tick up in FY25 due to a rapid decline in inflation and will remain above the forecast ‘B’ median of just over 50%. The interest payment/revenue ratio, which we forecast at 59% in FY25, will narrow, but remain well above the ‘B’ median of about 13%, given a high share of domestic debt and a narrow revenue base.
Lower Inflation, Economic Stability: We expect CPI inflation to average 5% yoy in FY25, from over 20% in FY23-FY24, on fading base effects from several rounds of energy price reforms, before picking up again to 8% in FY26, in line with urban core inflation over the past few months. The SBP held its policy rate steady at 12% in March, noting pressures on the current account (CA) and persistent core inflation, after 1,000bp of rate cuts between May 2024 and January 2025. We expect GDP growth to edge up to 3% in FY25.
External Deficit Contained: Pakistan posted a CA surplus of USD700 million in 8MFY25 on surging remittances and favourable import prices. Imports picked up in early 2025 and we expect external deficits to widen from our forecast of a broadly balanced position for FY25 on stronger domestic demand. Nevertheless, they should remain below 1% of GDP in the coming years. We think some informal FX demand management persists after the loosening exchange rate and import controls, and market reforms in 2023.
Risks from Global Volatility: International trade tensions could hurt Pakistan’s goods exports, with exports to the US, mostly textiles, accounting for 3% of GDP (35% of the total) in FY24. Lower commodity import prices could soften the blow on the trade balance. Remittances, Pakistan’s main source of external receipts, mostly come from the Middle East and tend to be resilient to the economic cycle. Pakistan has become less reliant on market and commercial financing in recent years, but market turmoil could still reduce access to loan funding.
Reserve Recovery: We expect a further buildup of gross reserves after the SBP’s purchase of FX in the interbank market brought them to just under USD18 billion in March 2025 (about three months of external payments), from about USD15 billion at FYE24 and a low of less than USD8 billion in early 2023. Measures of net FX reserves are much lower, reflecting FX reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP. Nevertheless, we still view gross reserves as the most relevant indicator of Pakistan’s external liquidity.
Funding Needs Still Large: The government will face about USD9 billion in external debt maturities in FY26 after over USD8 billion in FY25 (nearly USD5 billion in 2HFY25). Both figures exclude USD13 billion in bilateral deposits and loans that are regularly rolled over, of which USD4 billion is at the SBP. The next international bond maturity is in September 2025. Besides bilateral rollovers, the authorities secured USD4 billion in external financing in 1HFY25 from a mix of multilateral and commercial sources and are expecting to obtain USD10 billion in 2HFY25, of which USD4 billion would be from multilaterals and USD5 billion from various commercial loans, mainly refinancing from Chinese banks.
Challenging Politics, Security: Prime Minister Shehbaz Sharif’s PMLN party and its allies received a mandate that was weaker than we expected in elections in early 2024, although they still have a constitutional majority in the National Assembly and are backed by the country’s influential military. Former prime minister Imran Khan, imprisoned since May 2023, remains highly popular. Domestic political and economic fractures are compounded by the increased frequency of security incidents along the border with Afghanistan and in the Balochistan province.
Implementation Risks: Governments from across the political spectrum in Pakistan have had a mixed record of IMF programme performance, often failing to implement or reversing the required reforms. The current apparent consensus within Pakistan on the need for reform could weaken over time. Technical challenges will also be significant.
ESG – Governance: Pakistan has an 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, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Pakistan has a WBGI ranking at the 22nd percentile.
