• S&P says upgrade driven by $17bn bilateral support and improved fiscal indicators amid IMF reforms
• Emphasises that political stability remains crucial for further strengthening credit profile

ISLAMABAD: Citing improved external metrics and a more stable fiscal outlook, S&P Global Ratings on Thursday upgraded Pakistan’s long-term sovereign credit rating to ‘B-’ with a stable outlook — the first such upgrade in over six years. The move comes on the back of $17 billion in bilateral support from Saudi Arabia, China, the UAE, and Kuwait by the end of June.

Pakistan last held this rating (B- with stable outlook) in February 2019. It was downgraded to B- with a negative outlook in July 2022 and further to ‘CCC+’ in December 2022 — placing it in junk status amid deteriorating external finances.

“S&P Global Ratings raised its long-term sovereign credit ratings on Pakistan to ‘B-’ from ‘CCC+’, and its short-term ratings to ‘B’ from ‘C’. The outlook on the long-term rating is stable. At the same time, we revised our transfer and convertibility assessment to ‘B-’ from ‘CCC+’,” said the US-based agency in a statement.

It noted that official aid, combined with improvements in the balance of payments, had boosted foreign exchange reserves and eased near-term external vulnerabilities. Despite high debt servicing costs, S&P credited the government’s progress on revenue expansion and moderating inflation for accelerating fiscal consolidation.

The agency said the stable outlook reflected expectations that external support from multilateral and bilateral partners — along with fiscal improvements — would continue over the next 12 months to meet Pakistan’s substantial debt obligations.

Support from bilateral creditors, including China, Saudi Arabia, the UAE and Kuwait, has been “critical” to meeting Pakistan’s high external financing needs.

“The total support from these four partners, in the form of central bank deposits and swaps, reached $16.8bn as of end-FY25,” S&P stated. However, the agency warned that unless Pakistan achieves a sustained period of strong balance-of-payments performance, it would remain reliant on the renewal and possible extension of these credit lines and commercial facilities.

S&P also cautioned that ratings could be lowered if Pakistan’s external or fiscal indicators deteriorate significantly. Risks include a sharp fall in usable reserves, sudden withdrawal of bilateral or multilateral support, or rising interest costs that exacerbate debt servicing stress.

Conversely, the ratings could improve if institutional and political conditions permit deeper economic reforms, leading to stronger growth and faster fiscal consolidation than initially expected.

The agency observed that Pakistan had reduced its dependence on favourable macroeconomic conditions to meet its external obligations by replenishing reserves over the past year. The IMF’s $7bn Extended Fund Facility (EFF), approved in September 2024, was identified as a turning point in stabilising the macroeconomic outlook.

Following the programme’s implementation and sustained support from bilateral partners, Pakistan’s foreign reserves (including the central bank’s gold holdings) rose to $20.5bn by July 4, from a low of $6.7bn in December 2022 — prompting the earlier downgrade. Current reserves are now sufficient to meet external principal and interest payments of $13.4bn for FY26.

For the first time in 14 years, Pakistan’s current account posted a surplus in FY25, driven by record remittances of $39bn — equivalent to 9.5pc of GDP. The surplus, amounting to 0.5pc of GDP, contributed to easing external pressures.

The IMF-led reforms also led to a significant increase in tax revenues, rising by 3pc of GDP in the past year. Alongside expenditure controls, S&P forecast the general government deficit to narrow to 5.1pc of GDP in FY26, down from 7.9pc in FY22 — though still above the government’s target of 3.9pc.

Inflation has declined from a peak of 29pc in FY23, and the agency expects consumer price inflation to average 6.5pc over the next two to three years. With easing monetary conditions and falling interest rates, the government’s interest payments are projected to decline to an average of 41pc of revenues over the next three years — down from over 60pc in FY24. Still, Pakistan’s interest-to-revenue ratio remains among the highest of all rated sovereigns.

S&P projected GDP growth of 3.6pc in FY26, supported by lower inflation and IMF-backed reforms. However, it warned that reform momentum could face political and social resistance, especially under a fractious political environment marked by public fatigue with austerity and taxation measures.The rating agency emphasised that political stability remains crucial for further strengthening Pakistan’s credit profile.

It noted that domestic and external security risks continue to constrain the rating. Although security has improved since the early 2010s, potential for deterioration remains. The recent cross-border hostilities with India following the Pahalgam terrorist attack in May 2025 underscored the risk of miscalculation, which could escalate tensions and significantly worsen credit risks.

Published in Dawn, July 25th, 2025