Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-’ from ‘CCC+’, while maintaining the outlook 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,” Fitch said in a statement on Tuesday.
“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.”
Pakistan receives record $4.1bn in remittances in March, says SBP governor
The rating agency cautioned that 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”.
Talking about the ongoing Pakistan programme with the International Monetary Fund (IMF), the global credit rating agency said the South Asian country 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,“it said.
Fitch forecasted that 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.”
Fitch said that 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.
On government debt, Fitch informed that Pakistan’s government debt to GDP ratio would gradually 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%.”
Whereas, 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.”
Fitch expects CPI inflation in Pakistan to average 5% YoY in FY25, from over 20% in FY23-FY24, before picking up again to 8% in FY26, in line with urban core inflation over the past few months.
“We expect GDP growth to edge up to 3% in FY25,” it said.
On the external front, Fitch noted that Pakistan posted a current account (C/A) surplus of $700 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.”
Fitch warned that 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,” it said.
It noted that remittance inflows, 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,” it said.
“We expect a further buildup of gross reserves after the SBP’s purchase of FX in the interbank market brought them to just under $18 billion in March 2025 (about three months of external payments), from about $15 billion at FYE24 and a low of less than $8 billion in early 2023,” it said.
The rating agency added that the government will face about $9 billion in external debt maturities in FY26 after over $8 billion in FY25 (nearly $5 billion in 2HFY25).
Talking about the volatile political situation, Fitch noted that governments from across the political spectrum in Pakistan have had a mixed record of IMF programme performance, often failing to implement or reverse the required reforms.
“The current apparent consensus within Pakistan on the need for reform could weaken over time. Technical challenges will also be significant,” it said.
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