Agency cites IMF-backed reforms, stronger reserves, fiscal consolidation and improving institutional capacity
ISLAMABAD: S&P Global Ratings on Wednesday upgraded Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-‘ with a stable outlook, returning the country to the ‘B’ rating category for the first time in nearly nine years.
The upgrade reflects Pakistan’s improved institutional capacity, sustained implementation of economic reforms under the International Monetary Fund (IMF) programme, stronger fiscal performance and a marked improvement in the country’s external position.
S&P also affirmed Pakistan’s ‘B’ short-term sovereign credit rating and upgraded its transfer and convertibility assessment to ‘B’ from ‘B-‘.
Stable outlook reflects reform momentum
S&P said the stable outlook reflects its confidence that Pakistan’s improved political and institutional environment will support the continuation of structural reforms aimed at strengthening macroeconomic stability and sustaining economic growth.
“The stable outlook reflects our view of Pakistan’s improved political and institutional settings,” the agency said, adding that continued reforms would help maintain fiscal discipline and meet the country’s external financing requirements.
IMF programme underpins recovery
The ratings agency attributed the upgrade largely to Pakistan’s progress under the $7 billion IMF Extended Fund Facility (EFF) approved in September 2024.
According to S&P, Pakistan has met most programme targets, enabling timely IMF disbursements, strengthening investor confidence and supporting fiscal consolidation.
Foreign exchange reserves strengthen
S&P highlighted the sharp improvement in Pakistan’s external position, noting that total foreign exchange reserves, including the State Bank of Pakistan’s gold holdings, increased to $25.3 billion at the end of June 2026 from $6.7 billion in December 2022.
The agency said the current reserve position provides adequate coverage for the government’s $16.4 billion in external principal repayments due over the next 12 months.
It also noted Pakistan’s successful return to international capital markets in April 2026 through the issuance of a $750 million Eurobond and its inaugural CNY1.75 billion Panda Bond, which helped diversify external financing sources.
Fiscal consolidation gains traction
S&P said Pakistan has made significant progress in improving public finances through stronger tax administration and enhanced revenue mobilisation.
Tax revenues increased by 3.2 percentage points of GDP during the fiscal year ended June 2025, with the positive trend continuing into FY2025-26.
The agency projects Pakistan’s general government fiscal deficit to narrow to around 4 percent of GDP in FY2026-27, compared with nearly 8 percent of GDP during the economic crisis in FY2021-22 and FY2022-23.
S&P also expects the country’s net government debt-to-GDP ratio to continue declining gradually, although it is likely to remain above 60 percent over the medium term.
Meanwhile, government interest payments are forecast to decline to an average of 38 percent of revenue over the next three years, compared with more than 60 percent in FY2023-24, reflecting lower domestic borrowing costs.
Economy expected to sustain growth
The agency estimated Pakistan’s economy expanded by 3.6 percent in FY2025-26, marking the third consecutive year of economic growth following the contraction recorded in FY2022-23.
S&P forecasts GDP growth of 3.5 percent in FY2026-27, supported by continued structural reforms despite inflationary pressures stemming from higher global energy prices linked to tensions in the Middle East.
Consumer inflation averaged 7.2 percent during FY2025-26, compared with 4.5 percent a year earlier, but remained substantially below the 23.4 percent recorded in FY2023-24.
The agency expects inflation to moderate further to around 6.5 percent by FY2028-29.
External financing outlook improves
S&P said continued financial support from bilateral partners, including China, Saudi Arabia and Kuwait, alongside IMF assistance, has played a key role in strengthening Pakistan’s external financing position.
The agency noted that bilateral central bank deposits and currency swap arrangements totalled $16.8 billion at the end of FY2025-26.
It also highlighted renewed multilateral financing, including the World Bank’s $20 billion Country Partnership Framework, as a positive factor supporting Pakistan’s medium-term financing outlook.
According to S&P, Pakistan’s current account deficit is expected to remain manageable, averaging around 0.9 percent of GDP between FY2026-27 and FY2028-29.
Risks remain
Despite the upgrade, S&P cautioned that Pakistan remains exposed to external financing risks because of sizeable debt repayments and continued reliance on bilateral financing rollovers.
The agency warned that the sovereign rating could face downward pressure if reform momentum weakens, support from bilateral and multilateral partners declines or domestic interest rates increase sharply, raising debt servicing costs.
Conversely, S&P indicated that further upgrades could be considered if Pakistan continues strengthening its fiscal and external indicators by reducing net government debt below 60 percent of GDP, narrowing fiscal deficits and improving external debt metrics.
The latest rating upgrade is expected to enhance investor confidence, improve Pakistan’s access to international financial markets and support the government’s efforts to attract foreign investment while sustaining economic reforms.