Fitch upgrades Pakistan credit rating on upbeat external funding outlook

Fitch Ratings has upgraded Pakistan’s credit rating, attributing the development to improved external funding prospects following a new International Monetary Fund (IMF) bailout. Although still below investment grade, analysts suggest that the upgrade indicates a reduced risk of default.

The rating agency raised 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.

However, the agency did warn that renewed deterioration in external liquidity conditions, delaying IMF programme reviews, or indications that the authorities were considering debt restructuring could lead to downgrades in the future.

"The upgrade reflects greater certainty over the continued availability of external funding, in the context of Pakistan's SLA (staff-level agreement) with the IMF on a new 37-month USD7 billion EFF (extended fund facility)," Fitch said in a handout released on Monday.

According to the rating agency, 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," it added.

Fitch said Pakistan and the IMF reached the SLA on 12 July.

Highlighting the fiscal struggles that lie ahead for Pakistan, the rating agency notes that before likely IMF board approval by end-August, the government will have to obtain new funding assurances from bilateral partners, chiefly Saudi Arabia, the UAE and China, totalling about $4 billion-5 billion throughout the EFF.

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

It said Pakistan completed its nine-month Stand-by Arrangement with the IMF in April, while over the past year, it raised taxes, cut spending and raised electricity, gas and petrol prices.

The agency observed that the government also all but eliminated the gap between the interbank and parallel market exchange rates through a crackdown on the black market and regulation of exchange houses.

Pakistan has been struggling with boom-and-bust cycles for decades, leading to 22 IMF bailouts since 1958. Currently the IMF is fifth-largest debtor, owing $6.28 billion as of July 11, according to the lender's data.

The latest economic crisis has been the most prolonged and has seen the highest ever levels of inflation, pushing the country to the brink of a sovereign default last summer before an IMF bailout.

The conditions of the programme have become tougher. The latest bailout is aimed at cementing stability and inclusive growth in the crisis-plagued South Asian country, the IMF said.