Islamabad: The continuation of Pakistan’s International Monetary Fund (IMF) program and financial assistance from other multilateral and bilateral lenders depends on progress in structural reforms, according to Fitch Ratings.
In its latest report, the credit rating agency highlighted that securing external financing remains a major challenge due to significant debt maturities and lenders’ existing exposures. While authorities have allocated approximately $6 billion in funding from multilateral sources, including the IMF, in FY2025, around $4 billion will be used to refinance existing debt.
Despite some setbacks, Pakistan has made progress in fiscal reforms. The country’s primary fiscal surplus has exceeded IMF targets, though federal tax revenue fell short of the IMF’s performance criteria in the first half of FY2025. A key structural requirement under the IMF’s Extended Fund Facility (EFF) was the implementation of higher agricultural income taxes by provinces, but delays caused the country to miss the January 2025 deadline.
Fitch noted that positive rating action could result from a sustained recovery in reserves, reduced external financing risks, and adherence to fiscal consolidation measures. Conversely, any delays in IMF reviews could lead to a negative outlook.
Pakistan has steadily restored economic stability and bolstered external buffers. The State Bank of Pakistan (SBP) cut policy rates to 12% in January 2025, reflecting progress in controlling inflation, which dropped to just over 2% year-on-year, down from an average of nearly 24% in FY2024. This sharp disinflation is attributed to exchange rate stability, earlier subsidy reforms, and a tight monetary policy stance that curbed domestic demand.
Economic activity is now gaining momentum, benefiting from policy stability and falling interest rates. Fitch expects real value-added growth of 3% in FY2025. In October 2024, private sector credit growth turned positive in real terms for the first time since June 2022.
Robust remittance inflows, strong agricultural exports, and tight policy measures have helped Pakistan’s current account register a $1.2 billion surplus in the six months leading to December 2024, compared to a deficit in FY2024. Foreign exchange market reforms implemented in 2023 contributed to this shift.
Fitch’s rating upgrade to ‘CCC+’ in July 2024 was based on expectations of a modest widening in the current account deficit in FY2025. Meanwhile, forex reserves are set to surpass IMF’s $7 billion EFF targets. By the end of 2024, Pakistan’s gross official reserves had reached over $18.3 billion, covering approximately three months of external payments, up from $15.5 billion in June 2024.
However, reserves remain low relative to the country’s funding requirements. Pakistan is due to repay over $22 billion in external public debt in FY2025, including nearly $13 billion in bilateral deposits. Fitch believes these deposits will be rolled over, as previously assured by bilateral partners. In December, Saudi Arabia rolled over $3 billion, followed by the UAE’s $2 billion in January.
New bilateral capital flows are expected to be more commercial and linked to reform progress. Discussions regarding the partial sale of a government stake in a copper mine to a Saudi investor illustrate this shift. Additionally, Pakistan and Saudi Arabia recently agreed on a deferred oil payment facility.
A newly announced $20 billion, 10-year framework with the World Bank aligns with these developments. The bank’s existing project portfolio in Pakistan stands at around $17 billion, with annual net lending averaging $1 billion over the past five years.
Pakistan’s External Financing Challenges Persist Despite Progress
Despite improvements in forex reserves, Pakistan’s external financing needs remain substantial. According to Fitch, the country must repay over $22 billion in external debt in FY2025, including $13 billion in bilateral deposits.
Last month, Pakistan secured a $1 billion loan from two Middle Eastern banks at a 6-7% interest rate. The country’s central bank aims to raise up to $4 billion from Middle Eastern commercial banks by the next fiscal year.
To secure continued IMF and other multilateral support, Pakistan must persist with structural reforms, particularly in fiscal consolidation and improving the business environment. The ongoing $7 billion IMF program, set for review later this month, is designed to address deep-rooted economic challenges such as large fiscal and current account deficits.
Fitch warned that any deterioration in external liquidity due to IMF review delays could lead to negative rating action. However, it acknowledged Pakistan’s progress in rebuilding foreign exchange reserves, which have surpassed IMF targets.
With economic activity benefiting from stability and falling interest rates, Fitch projects Pakistan’s real value-added growth at 3% for FY2025. Meanwhile, Finance Minister Muhammad Aurangzeb remains optimistic about an upgrade in the country’s credit rating, currently at CCC+ by Fitch and Caa2 by Moody’s—both in the “junk” category.
“Ideally, I would like to see some action in this direction before our fiscal year ends in June,” Aurangzeb stated last month.
