Fitch upgrades Pakistan's rating to 'B-' from 'CCC+'
Business
The upgrade also reflects confidence that the country would implement structural reforms
(Reuters) – Global ratings agency Fitch upgraded Pakistan’s foreign currency credit rating to ‘B-’ from ‘CCC+’ on Tuesday, citing increased confidence in the country’s progress in narrowing its budget deficits.
The upgrade also reflects confidence that the country would implement structural reforms, supporting its International Monetary Fund (IMF) programme performance and funding availability, Fitch said.
The agency said though ongoing global trade tensions could create external pressure, its low dependence on exports and market financing should mitigate risks.
The economy had been teetering on the brink of default ever since inflation rose to a record high in May 2023 and reserves started shrinking, but has seen some respite thanks in part to a $7 billion bailout programme from the IMF.
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FISCAL CONSOLIDATION, EXTERNAL STABILISATION
“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,” Fitch said in a statement.
POLICY CREDIBILITY GRADUALLY REBUILT
The global rating agency further said, “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,” said the Fitch statement.
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,” it added.
