Fitch Ratings has raised Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘CCC’ to ‘CCC+’. Almost seven months after the gap (Dec’23: CCC), Fitch upgraded this rating for Pakistan. The following factors led to the upgrade:
Enhanced external funding prospects
- The upgrade signifies improved access to external funding, supported by a new 37-month, USD7bn EFF agreement with the IMF.
- To recall, in Jul’24, Pakistan reached a staff-level agreement with the IMF.
- Before the IMF Board’s expected approval by end-Aug, Pakistan needs to secure funding assurances from bilateral partners, including Saudi Arabia, the UAE, and China, totaling USD 4-5bn. This is considered achievable given past support and recent fiscal measures.
- Strong performance under the previous IMF arrangement helped reduce fiscal deficits and boost foreign exchange reserves.
- However, significant funding needs mean Pakistan remains vulnerable if key reforms are not implemented.
Structural reforms
- The new EFF aims to address structural issues in taxation, energy, and state-owned enterprises.
- It includes a goal to raise tax revenues by 3% of GDP, from under 9% in FY24, with higher taxes on the agricultural sector to be legislated at the provincial level.
Recent policy successes
- Pakistan completed a 9M Stand-by Arrangement with the IMF in Apr’24.
- Over the past year, it has increased taxes, reduced spending, and raised electricity, gas, and petrol prices.
- Efforts to close the gap between official and parallel market exchange rates have been effective.
Courtesy – AHL Research
