KARACHI: Pakistan has continued to make headway in restoring economic stability and rebuilding external buffers, Fitch Ratings said in a note.
It added that progress on difficult structural reforms would be key to upcoming International Monetary Fund (IMF) programme reviews and continued financing from multilateral and bilateral lenders.
The State Bank of Pakistan’s (SBP) decision to cut the policy rate to 12% on January 27 underscored recent progress in taming inflation, Fitch noted. Consumer price inflation fell to just over 2% year-on-year in January 2025, down from an average of nearly 24% in the fiscal year ending June 2024 (FY24).
It wrote that rapid disinflation reflected fading base effects from earlier subsidy reforms and exchange rate stability, supported by a tight monetary stance that subdued domestic demand and external financing needs.
Economic activity is now benefiting from stability and falling interest rates, having absorbed tighter policy settings, Fitch added.
It expects real value-added growth of 3.0% in FY25, noting that private sector credit growth turned positive in real terms in October 2024 for the first time since June 2022.
Strong remittance inflows, robust agricultural exports, and tight policy measures helped Pakistan’s current account post a surplus of about $1.2 billion (over 0.5% of GDP) in the six months to December 2024, reversing a similarly sized deficit in FY24.
Fitch said that foreign exchange market reforms in 2023 facilitated this shift. It had anticipated a slight widening of the current account deficit in FY25 when it upgraded Pakistan’s rating to ‘CCC+’ in July 2024.
Foreign exchange reserves are set to exceed targets under Pakistan’s $7 billion IMF Extended Fund Facility (EFF) and Fitch’s earlier projections. Gross official reserves reached over $18.3 billion by end-2024, about three months’ worth of external payments, up from around $15.5 billion in June.
However, reserves remain low relative to funding needs, with over $22 billion in public external debt maturing in FY25.
This includes nearly $13 billion in bilateral deposits, which Fitch believes will be rolled over, citing commitments to the IMF. Saudi Arabia rolled over $3 billion in December, while the UAE extended $2 billion in January.
Fitch wrote that new bilateral capital flows are expected to be increasingly commercial and linked to reforms.
It cited discussions on the partial sale of a government stake in a copper mine to a Saudi investor as an example. Pakistan and Saudi Arabia also recently agreed on a deferred oil payment facility.
Despite large maturities and lenders’ existing exposures, securing sufficient external financing remains a challenge. The authorities have budgeted for about $6 billion in funding from multilaterals, including the IMF, in FY25, but Fitch noted that around $4 billion of this would effectively refinance existing debt.
A recently announced $20 billion 10-year framework with the World Bank Group aligns broadly with expectations, with the group’s current project portfolio at $17 billion and annual net new lending averaging $1 billion over the past five years.
Fitch acknowledged progress on fiscal reform despite some setbacks. The primary fiscal surplus has outperformed IMF targets, although federal tax revenue growth in the first half of FY25 fell short of the IMF’s indicative performance criterion.
It also noted that while all provinces have legislated higher agricultural income taxes — a key structural condition of the EFF — the reform’s January 2025 implementation deadline was missed due to delays.
In July, Fitch said that positive rating action could follow sustained reserve recovery, further easing of external financing risks, and fiscal consolidation in line with IMF commitments.
However, it warned that deteriorating external liquidity, such as delays in IMF reviews, could trigger negative action.
