ISLAMABAD   -  Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC’.  Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

The upgrade reflects greater certainty over continued availability of external funding, in the context of Pakistan’s staff-level agreement (SLA) with the IMF on a new 37-month USD7 billion Extended Fund Facility (EFF). Strong performance on the previous, more temporary IMF arrangement helped the country narrow fiscal deficits and rebuild foreign exchange (FX) reserves, and further improvements are likely. Nevertheless, Pakistan’s large funding needs leave it vulnerable if it fails to implement challenging reforms, which could undermine programme performance and funding.

Pakistan and the IMF reached the SLA on 12 July. Before IMF Board approval, which we assume by end-August, the government will have to obtain new funding assurances from bilateral partners, chiefly Saudi Arabia, the UAE and China, totalling about USD4 billion-5 billion over the duration of the EFF. “We believe this will be achievable, given the strong past record of support and significant policy measures in the recent budget for the fiscal year ending June 2025 (FY25),” the Fitch Ratings said in its assessment. “We forecast the current account deficit (CAD) to stay relatively contained at about USD4 billion (about 1% of GDP) in FY25, after about USD700 million in FY24, given tight financing conditions and subdued domestic demand. Contractionary economic and fiscal policies, lower commodity prices and rupee depreciation have driven the sharp narrowing of the CAD from over USD17 billion in FY22.

 FX shortages have eased with the return of remittances to the official banking system, reversing their decline in 2H22.”

The ‘CCC+’ Long-Term Foreign-Currency IDR also reflects the following factors:

The close outcome of the February elections delivered a weaker-than-expected mandate for Prime Minister Shehbaz Sharif’s PMLN party. PMLN and its allies command only a slim majority in the National Assembly after a recent Supreme Court ruling re-allocating reserved seats in favour of independents linked with former prime minister Imran Khan’s PTI party. Mr Khan has been in prison since May 2023, but remains popular.

“We estimate government debt fell to 68% of GDP by FYE24, from 75% at FYE23, due to high inflation and deflator effects, offsetting soaring domestic interest costs. This is broadly in line with the B/C/D median. We expect inflation and interest costs to decline in tandem, with economic growth and primary surpluses driving government debt/GDP gradually lower. Debt/revenue (over 500% in FY24) and interest/revenue (over 60%) ratios are far worse than that those of peers, largely due to very low revenue/GDP, although high interest rates also benefit tax revenue and SBP profits,” it said.

Pakistan has an ESG Relevance Score (RS) of ‘5’ for both political stability and rights and for the rule of law, institutional and regulatory quality and control of corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM).