Fitch Upgrades Pakistan’s Credit Rating Amid IMF Support and Economic Reforms

On Monday, Fitch Ratings upgraded Pakistan’s long-term foreign currency issuer default rating (IDR) from CCC to CCC+. This upgrade reflects an improvement in Pakistan’s external liquidity and funding conditions, buoyed by recent agreements with the International Monetary Fund (IMF).

Fitch highlighted the significant progress under the previous IMF arrangement, which helped Pakistan reduce its fiscal deficits and rebuild its foreign exchange reserves. However, the agency cautioned that Pakistan’s substantial funding needs could pose risks if necessary reforms are not implemented, potentially jeopardizing program performance and funding.

The agency anticipates that the IMF board will approve the $7 billion, 37-month Extended Fund Facility (EFF) by the end of August. To secure this, the Pakistani government must obtain new funding assurances from key bilateral partners, including Saudi Arabia, the UAE, and China, totaling around $4-5 billion throughout the program’s duration. Fitch believes this goal is achievable due to the strong record of past support and recent significant policy measures.

Under the previous IMF program, Pakistan completed its nine-month Stand-by Arrangement in April. The government made notable strides by raising taxes, cutting spending, and increasing prices for electricity, gas, and petrol. Additionally, the government worked to close the gap between the interbank and parallel market exchange rates through crackdowns on the black market and regulation of exchange houses.

Fitch does not provide outlooks for sovereigns rated CCC+ or below. The agency projects that Pakistan’s current account deficit (CAD) will remain relatively controlled at around $4 billion, or 1% of GDP, in FY25, following a deficit of approximately $700 million in FY24. This stability is attributed to tight financing conditions and subdued domestic demand.

On the external front, Pakistan’s foreign exchange reserves have improved but remain low. The State Bank of Pakistan (SBP) is rebuilding its FX reserves, bolstered by new funding inflows and a limited CAD. Official gross reserves, including gold, rose to over $15 billion by June 2024 and are expected to approach $22 billion by the end of FY26, nearing their 2021 peak. Fitch noted that net liquid FX reserves, excluding gold and FX reserve deposits of banks, recovered to over $9 billion by June 2024.

Regarding fiscal management, Fitch reported that half of the revenue efforts under the EFF are frontloaded into the FY25 budget, which was prepared in collaboration with IMF staff. The budget projects a headline deficit of 5.9% of GDP and a 2.0% primary surplus. Fitch forecasts 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.

Politically, Fitch expressed concerns about the weak mandate for Prime Minister Shehbaz Sharif’s PMLN party following the February elections. The party commands a slim majority in the National Assembly, exacerbated by a recent Supreme Court ruling reallocating reserved seats to independents linked with former Prime Minister Imran Khan’s PTI party. Although Khan remains popular, he has been imprisoned since May 2023.

Fitch’s upgrade underscores the positive developments in Pakistan’s economic and fiscal conditions but also highlights the ongoing challenges and political uncertainties facing the country.