International credit rating agency Fitch upgrades Pakistan credit rating to CCC+ from CCC. This upgrade signifies an improvement in Pakistan’s long-term foreign currency issuer default rating (IDR), reflecting better economic conditions and reforms. This upgrade reflects an improvement in Pakistan’s external liquidity and funding conditions, bolstered by the recent IMF agreement.
Fitch noted the positive performance under the previous IMF arrangement, which aided Pakistan in reducing fiscal deficits and rebuilding foreign exchange reserves. However, the agency cautioned that.
Pakistan’s substantial funding requirements could pose risks if critical reforms are not enacted, potentially jeopardizing program performance and future funding.
Fitch anticipates IMF board approval for the $7 billion, 37-month Extended Fund Facility (EFF) program by the end of August, 2024. To secure this, the government needs to obtain new funding assurances totaling around $4-5 billion from bilateral partners, particularly Saudi Arabia, the UAE, and China. Fitch believes this is achievable, given the past support and recent significant policy measures outlined in the fiscal year 2025 (FY25) budget.
Under the previous IMF program, Pakistan successfully completed its nine-month Stand-by Arrangement in April, 2024. Over the past year, the government implemented tax increases, reduced spending, and raised electricity, gas, and petrol prices. Additionally, it nearly closed the gap between the interbank and parallel market exchange rates through stringent measures against the black market and improved regulation of exchange houses.
Fitch does not assign outlooks to sovereigns rated CCC+ or below but projects that Pakistan’s current account deficit (CAD) will remain contained at about $4 billion (around 1% of GDP) in FY25, following $700 million in FY24. This stability is attributed to tight financing conditions and subdued domestic demand.
On the external front, Fitch acknowledged that while Pakistan’s foreign exchange reserves have improved, they remain low. The State Bank of Pakistan (SBP) is working to rebuild FX reserves with new funding inflows and controlled CADs, with official gross reserves, including gold, rising to over $15 billion by June 2024. These reserves are expected to approach $22 billion by the end of FY26, nearing their 2021 peak.
Fitch highlighted that the SBP’s net liquid FX reserves, excluding gold and FX reserve deposits of banks, have recovered to over $9 billion by June 2024. The SBP has reduced its forward liabilities to local banks and is approaching a balanced net foreign asset/liability position.
On the fiscal front, Fitch noted that half of the revenue efforts under the EFF are front-loaded into the FY25 budget, prepared with IMF staff collaboration. The budget projects a headline deficit of 5.9% of GDP and a 2.0% primary surplus. Fitch’s projections assume partial implementation, forecasting 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 narrow mandate for Prime Minister Shehbaz Sharif’s PMLN party following the February elections. The PMLN and its allies hold only a slim majority in the National Assembly after a Supreme Court ruling re-allocating reserved seats to independents linked with former Prime Minister Imran Khan’s PTI party.
