Fitch upgrades Pakistan’s long-term rating to ‘CCC+’
Fitch Ratings has upgraded Pakistan’s long-term foreign currency issuer default rating (IDR) from “CCC” to “CCC+,” signaling an improved capacity for repaying foreign debt ahead of the International Monetary Fund’s (IMF) executive board meeting to approve a $7 billion Extended Fund Facility (EFF).
This marks Fitch’s second rating upgrade for Pakistan in the past 12 months. Previously, the rating was downgraded to “CCC-” in February 2023. Fitch’s decision reflects increased certainty about continued external funding availability, particularly following Pakistan’s staff-level agreement (SLA) with the IMF on the new 37-month, $7 billion EFF.
Pakistan faces over $22 billion in external public debt maturing in the fiscal year 2024-25. This includes $13 billion in deposits and loans, approximately $4 billion of which are liabilities of the State Bank of Pakistan (SBP), as well as $4 billion each from Chinese commercial banks and multilateral creditors. The country's next international bonds are due in September 2025.
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Fitch noted that the government has identified over $24 billion in gross external financing, primarily from bilateral and multilateral sources, which may include potential bond issuance and a renewed oil facility with Saudi Arabia. Other possible sources of funding include foreign direct investment (FDI), non-resident portfolio inflows, and climate-related finance. The SBP is also rebuilding foreign exchange reserves, supported by new funding inflows and a limited current account deficit (CAD).
The SBP’s official gross reserves, including gold, were estimated to exceed $15 billion by June 2024—about three months of import coverage—up from nearly $10 billion at the end of June 2023. Fitch projects these reserves could reach nearly $22 billion by the end of FY26, approaching their 2021 peak. Meanwhile, the SBP’s net liquid FX reserves, excluding gold and FX reserve deposits of banks, recovered to over $9 billion by June 2024. The SBP is also working towards balancing its net foreign asset/liability position.
The previous $3 billion short-term IMF program helped Pakistan narrow its fiscal deficit and rebuild FX reserves, with expectations for continued improvements.
However, Fitch cautioned that Pakistan’s substantial funding needs make it vulnerable if it fails to implement necessary reforms, which could affect program performance and funding. The SLA reached on July 12, 2024, must be followed by securing new funding assurances from key bilateral partners—primarily Saudi Arabia, the UAE, and China—totaling around $4-5 billion over the EFF duration.
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Fitch believes this goal is achievable given the past support and significant policy measures in the recent budget for the fiscal year ending June 2025. The new EFF aims to address long-standing structural issues in the tax system, energy sector, and state-owned enterprises, while committing to exchange rate flexibility and monetary policy improvements.
The government’s target includes a three-percentage-point increase in tax revenue relative to GDP, from under 9% in FY24, which will require higher taxes on the influential agricultural sector at the provincial level.
In addition to successfully completing a nine-month stand-by arrangement with the IMF in April, the government has implemented tax increases, spending cuts, and raised prices for electricity, gas, and petrol. Efforts have also been made to narrow the gap between inter-bank and parallel market exchange rates through a crackdown on the black market and regulation of exchange houses.
Source:
Express Tribune