Fitch upgrades Pakistan’s long-term foreign currency rating to CCC+

International credit rating agency Fitch on Monday upgraded Pakistan’s long-term foreign currency issuer rating (IDR) from CCC to CCC+.

The upgrade signals an improvement in Pakistan’s external liquidity and financing conditions, bolstered by the recent IMF accord.

Fitch highlighted the strong performance under the previous agreement with the IMF, which helped Pakistan narrow its fiscal deficits and rebuild its foreign exchange reserves. However, the agency warned that Pakistan’s large funding needs could leave it vulnerable if demanding reforms are not implemented, potentially undermining program performance and funding.

Fitch expects IMF board approval for the $7 billion, 37-month program by the end of August. However, the government needs to secure new funding assurances from bilateral partners, mainly Saudi Arabia, the United Arab Emirates and China, totaling around $4-5 billion over the EDF.

“We believe this will be achievable, given the strong past track record of support and significant policy measures in the recent budget for the fiscal year ending June 2025 (FY25),” Fitch noted.

Under the previous IMF programme, Pakistan successfully completed its nine-month Stand-by Arrangement in April. Over the past year, the government has raised taxes, cut spending and raised electricity, gas and petrol prices. It also virtually eliminated the gap between interbank and parallel market exchange rates by cracking down on the black market and regulating foreign exchange institutions.

Fitch does not assign an outlook to sovereign bonds rated CCC+ or below. The agency projects the current account deficit (CAD) to remain relatively subdued at around $4 billion (about 1% of GDP) in FY25, after around $700 million in FY24. This is attributed to tight financing conditions and subdued domestic demand.

On the external front, Fitch noted that Pakistan’s foreign exchange reserves have recovered but remain low. The State Bank of Pakistan (SBP) is rebuilding foreign exchange reserves amid fresh funding inflows and tight CAD, with official gross reserves, including gold, expected to reach over $15 billion by June 2024. This is expected to rise to nearly $22 billion by the end of FY26, approaching a peak in 2021.

Fitch pointed out that the SBP’s net foreign reserves, excluding banks’ gold and foreign reserve deposits, have recovered to over $9 billion by June 2024. The SBP has reduced its term liabilities to local banks and is nearing a balanced net asset/liability .

On the fiscal front, Fitch said half of the revenue efforts under the EFF are front-loaded in the FY25 budget, which was drawn up in collaboration with IMF staff. The budget foresees a nominal deficit of 5.9% of GDP and a primary surplus of 2.0%. Fitch’s forecasts assume partial implementation, projecting a primary surplus of 0.8% of GDP and a general fiscal deficit of 6.9% of GDP in 2025, improving to 1.3% of GDP and 6% of GDP in 26, respectively.

Politically, Fitch expressed concerns that the close result of February’s election produced a weaker-than-expected mandate for Prime Minister Shehbaz Sharif’s PMLN party.

“The PMLN and its allies hold only a slim majority in the National Assembly following a recent Supreme Court decision to redistribute reserved seats in favor of independents linked to former prime minister Imran Khan’s PTI party. Khan has been in jail since in May 2023 but remains popular,” Fitch noted.