• Upgrade reflects renewed confidence in macroeconomic stability, policy credibility
• Rating agency sees budget deficit declining to 6pc of GDP in FY25

ISLAMABAD: After a gap of about three years, Fitch Ratings upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) on Tuesday to ‘B-’ from ‘CCC+’ with a stable outlook.

The improvement stems from confidence in macroeconomic stability and the revival of policy credibility supported by the International Monetary Fund (IMF) programme, the New York-based rating agency said.

Fitch Ratings had downgraded Pakistan from ‘B+’ to ‘B-’ in mid-2021 amid worsening economic fundamentals, followed by a further cut to ‘CCC+’ in October 2022 due to reversals in commitments made to the IMF.

About its latest decision, Fitch said the upgrade reflected its 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.

It expected tight economic policy settings to continue to support the 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, it said.

Fitch, one of the top three global rating agencies, said Pakistan’s policy credibility had been gradually rebuilt, leading to a staff-level agreement with the IMF on the first review of the $7 billion Extended Fund Facility (EFF) and a new $1.3bn Resilience and Sustainability Facility (RSF), both set to last until the third quarter of 2027.

It said that 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.

Fitch also forecast improving fiscal performance, with budget deficit narrowing to 6 per cent of GDP this fiscal year and around 5pc in the medium term from nearly 7pc in fiscal 2024.

“Our FY25 forecast is conservative. We expect the primary surplus to more than double to over 2pc of GDP in FY25,” it said, adding that revenue shortfall could 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 2pc of GDP to the government in FY25,” it said.

With the debt-to-GDP ratio falling to 67pc in FY24 from 75pc in FY23, Fitch forecast a gradual 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. The interest payment-revenue ratio was forecast at 59pc in FY25 and is narrowing further.

The rating agency estimated the headline inflation to fall to 5pc in FY25 from over 20pc in FY23 and FY24 on fading base effects from several rounds of energy price reforms before picking up again to 8pc in FY26. Fitch forecast GDP growth to edge up to 3pc in FY25.

Noting that the external deficit had also been contained, the rating agency said the country posted a current account surplus of $700 million in eight months of the current fiscal year on surging remittances and favourable import prices.

Published in Dawn, April 16th, 2025