ISLAMABAD  -  Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-’ from ‘CCC+’.

“The Outlook is Stable,” Fitch Ratings said on Tuesday.

The upgrade reflects Fitch’s increased confidence that Pakistan will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its IMF programme performance and funding availability. We also expect tight economic policy settings to continue to support recovery of international reserves and contain external funding needs, although implementation risks remain and financing needs are still large. Global trade tensions and market volatility could create external pressures, but risks are mitigated by lower oil prices and Pakistan’s low dependence on exports and market financing.

Pakistan and the IMF reached a staff-level agreement in March on the first review of the country’s USD7 billion Extended Fund Facility and a new USD1.3 billion Resilience and Sustainability Facility, both set to last until 3Q27. Pakistan performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although tax revenue growth fell short of its indicative target. Provincial governments have also legislated increases in agricultural income tax, a key structural benchmark. This follows Pakistan’s strong performance on its previous, more temporary arrangement, which expired in April 2024.“We forecast the general government budget deficit to narrow to 6% of GDP in the fiscal year ending June 2025 (FY25) and around 5% in the medium term, from nearly 7% in FY24. Our FY25 forecast is conservative. We expect the primary surplus to more than double to over 2% of GDP in FY25,” Fitch said. Shortfalls in tax revenue, in part due to lower-than-expected inflation and imports, will be offset by lower spending and wider provincial surpluses. The lagged effects of high domestic interest rates in recent years still weigh on fiscal performance, but also drove the State Bank of Pakistan’s (SBP) extraordinary dividend of 2% of GDP to the government in FY25, it added.

Government debt/GDP dropped to 67% in FY24, from 75% in FY23, and Fitch fore-cast a gradual decline over the medium term, reflecting tight fiscal policy, nominal growth and a repricing of domestic debt at lower rates. Nevertheless, the debt ratio will still tick up in FY25 due to a rapid decline in inflation and will remain above the forecast ‘B’ median of just over 50%. The interest payment/revenue ratio, which we forecast at 59% in FY25, will narrow, but re-main well above the ‘B’ median of about 13%, given a high share of domestic debt and a narrow revenue base.

“We expect CPI inflation to average 5% yoy in FY25, from over 20% in FY23-FY24, on fading base effects from several rounds of energy price reforms, before picking up again to 8% in FY26, in line with urban core inflation over the past few months. The SBP held its policy rate steady at 12% in March, noting pressures on the current account (CA) and persistent core inflation, after 1,000bp of rate cuts between May 2024 and January 2025. We expect GDP growth to edge up to 3% in FY25,” the Rating agency said.