Fitch upgrades Pakistan's credit rating amid economic reforms

In recent developments, Pakistan achieved an upgrade in its credit rating to 'B-' as assessed by Fitch, an international credit rating agency. This positive assessment is emblematic of the country's potential for implementation of significant structural reforms and reflects growing confidence from international institutions in Pakistan's economic stability. The Finance Minister Muhammad Aurangzeb welcomed this upgrade as it highlights the government's ongoing economic reforms and is expected to attract more investment, stimulate trade, and foster greater employment opportunities within the country. The agency's report indicates that the anticipated improvement in Pakistan's economic rating stems from evidence of sustainable macroeconomic stability achieved through various efforts, including the cooperation of financial institutions and government policies. Fitch's evaluation noted that the improvement is expected to drive a primary surplus which could exceed 2% of GDP in the fiscal year 2025. The expected fiscal discipline is largely fueled by reduced spending and increased provincial surpluses, as the country grapples with past economic challenges, such as high domestic interest rates and a struggling fiscal performance. In addition, Fitch observed that Pakistan's debt-to-GDP ratio has shown a downward trajectory, decreasing to 67% in FY24 from 75% in FY23. This is attributed to a tight fiscal policy and higher nominal growth rates, along with a favorable repricing of domestic debts at lower interest rates. The agency projected that inflation rates would also stabilize, estimating an average of 5% year-on-year for FY25, after a more tumultuous inflation landscape over the last couple of fiscal years. This improvement reflects the positive impact of policy reforms and energy pricing adjustments that should bolster the overall economic picture moving forward. Furthermore, Pakistan is reaping the benefits of stronger remittances and favorable import conditions, as exhibited by a current surplus totaling $700 million. This scenario, which demonstrates increased financial resilience, allows the nation to be somewhat less reliant on commercial financing than in previous years. Nevertheless, Fitch advised caution, highlighting potential risks related to implementation of continued reforms across the political spectrum. Although there appears to be current consensus regarding the need for reform, such consensus could erode over time, posing risks to fiscal future and economic recovery.