Pakistan’s economy is showing signs of stability, with significant improvements in key financial indicators, according to Fitch Ratings. The agency highlighted Pakistan’s progress in economic reforms, crucial for securing future reviews under the International Monetary Fund (IMF) program. Multilateral and bilateral financial support will also depend on these ongoing changes.
The State Bank of Pakistan (SBP) reduced the policy rate to 12% on January 27, reflecting progress in controlling inflation. Consumer prices dropped to just over 2% year-on-year in January 2025. In contrast, inflation averaged nearly 24% during the fiscal year ending in June 2024. Fitch noted that this sharp decline resulted from stable exchange rates, fading effects of earlier subsidy adjustments, and a tight monetary stance. These measures curbed domestic demand and reduced external financing needs.
Economic growth is benefiting from stability and lower interest rates. According to Fitch, Pakistan’s economy has adjusted to earlier restrictive policies. The agency forecasts a 3.0% real GDP growth for FY25. Private sector credit also turned positive in real terms in October 2024, marking a recovery since June 2022.
Pakistan’s current account balance has improved due to strong remittances, higher agricultural exports, and disciplined economic policies. The country recorded a $1.2 billion surplus, equal to over 0.5% of GDP, in the six months leading to December 2024. This turnaround is significant, considering the country had a similar-sized deficit in FY24.
Foreign exchange market reforms introduced in 2023 have helped this shift. Fitch had initially expected a slight widening of the current account deficit in FY25 when it upgraded Pakistan’s rating to ‘CCC+’ in July 2024. However, the situation improved beyond expectations.
Pakistan’s foreign exchange reserves are performing better than projected under the IMF’s $7 billion Extended Fund Facility (EFF). By the end of 2024, gross official reserves exceeded $18.3 billion, covering nearly three months of external payments. This was an improvement from $15.5 billion in June. However, the reserves still remain low compared to upcoming funding needs. Over $22 billion in public external debt is due in FY25.
Bilateral lenders have shown commitment to rolling over deposits, with Saudi Arabia extending $3 billion in December and the UAE renewing $2 billion in January. Fitch noted that future bilateral capital flows will likely be more commercial and tied to economic reforms. Discussions on selling part of a government stake in a copper mine to a Saudi investor illustrate this trend. Pakistan and Saudi Arabia have also agreed on a deferred oil payment facility.
Despite these positive developments, securing external financing remains a challenge. Pakistan’s authorities have planned to raise $6 billion from multilateral lenders, including the IMF, in FY25. However, Fitch pointed out that around $4 billion of this amount will be used to refinance existing debt. The World Bank Group’s recently announced $20 billion 10-year framework aligns with expectations. The group currently manages a $17 billion project portfolio in Pakistan, with annual net new lending averaging $1 billion over the past five years.
Fitch acknowledged Pakistan’s progress in fiscal reforms, though some setbacks remain. The country has maintained a primary fiscal surplus exceeding IMF targets. However, federal tax revenue growth in the first half of FY25 did not meet the IMF’s performance criteria. While all provinces have legislated higher agricultural income taxes, a key IMF condition, the implementation deadline in January 2025 was missed due to delays.
Fitch previously stated that a sustained recovery in foreign reserves, lower external financing risks, and fiscal consolidation in line with IMF agreements could lead to a positive rating upgrade. However, it also warned that any deterioration in external liquidity, such as delays in IMF reviews, could negatively impact Pakistan’s credit rating.
