Fitch Ratings has upgraded Pakistan’s long-term foreign currency issuer default rating (IDR) from CCC to CCC+.
This upgrade reflects improved external liquidity and funding conditions, supported by a recent agreement with the IMF.
Fitch credited the strong performance under the previous IMF program for helping Pakistan reduce fiscal deficits and rebuild foreign exchange reserves.
However, the agency cautioned that Pakistan’s substantial funding needs could pose risks if essential reforms are not implemented.
Fitch anticipates IMF board approval for a $7 billion, 37-month program by the end of August, conditional on new funding assurances from Saudi Arabia, the UAE, and China, amounting to approximately $4-5 billion.
“We believe this will be achievable given the strong past record of support and significant policy measures in the recent budget,” Fitch stated.
Under the previous IMF arrangement, Pakistan successfully completed a nine-month Stand-by Arrangement, raising taxes, cutting spending, and increasing utility prices. The government also closed the gap between interbank and parallel market exchange rates by cracking down on the black market.
Fitch does not provide outlooks for sovereigns rated CCC+ or below but forecasts that the current account deficit will remain contained at about $4 billion (1% of GDP) in FY25, after approximately $700 million in FY24. This is due to tight financing conditions and subdued domestic demand.
Fitch noted that Pakistan’s foreign exchange reserves have improved but remain low, with the State Bank of Pakistan (SBP) rebuilding reserves amid new funding inflows. Official gross reserves, including gold, are expected to rise to over $15 billion by June 2024 and nearly $22 billion by the end of FY26.
Fitch highlighted that the SBP’s net liquid FX reserves recovered to over $9 billion by June 2024 and that the SBP has reduced its forward liabilities to local banks.
On the fiscal side, Fitch mentioned that half of the revenue efforts under the IMF program are included in the FY25 budget, which aims for a 5.9% GDP deficit and a 2.0% primary surplus. Fitch projects a primary surplus of 0.8% of GDP and a 6.9% overall fiscal deficit in FY25, improving to 1.3% and 6% respectively in FY26.
Politically, Fitch expressed concerns about the narrow majority of Prime Minister Shehbaz Sharif’s PMLN party in the National Assembly after a recent Supreme Court ruling re-allocated reserved seats in favor of independents linked to former prime minister Imran Khan’s PTI party. Khan, despite being imprisoned since May 2023, remains popular.