Fitch Ratings upgraded the long-term foreign-currency issuer default rating (IDR) of Pakistan to “CCC+” on Monday. The credit rating agency had upgraded the South Asian country from “CCC-” to “CCC” in July of 2023.
Fitch attributed its decisions to added certainty that external funding will remain available following Pakistan’s staff-level agreement with the IMF on a “new 37-month $7.0 billion Extended Fund Facility”.
Pakistan has rebuilt FX reserves and narrowed its fiscal deficits – and further improvements are expected moving forward, the agency added.
The rating upgrade is significant for Pakistan as it tends to attract foreign investments, as per Saad Hanif of Ismail Iqbal Securities, who expects the development to “improve FDI and hot money flow into the country”.
Pakistan must secure funding from allies
Fitch expects the board of the International Monetary Fund to approve that $7.0 billion programme by the end of next month.
That approval is contingent on Pakistan securing new funding assurances worth up to $5.0 billion for the duration of the EFF from its bilateral partners, including China, Saudi Arabia, and the United Arab Emirates.
But Pakistan will likely meet that prerequisite considering it has a history of winning support from these countries and “significant policy measures in the recent budget for the fiscal 202”, the credit rating agency argued on Monday.
Note that Pakistan raised taxes and utility prices to complete its nine-month stand-by agreement with the IMF in April. It also cracked down on the black market to “eliminate the gap between the interbank and parallel market exchange rates”.
The Fitch upgrade indicates a positive shift in Pakistan’s economy and is constructive for the broader South Asian region as well which has seen slower growth over the past two years.
Pakistan has improved its FX reserves
Fitch expects the current account deficit of Pakistan to remain relatively contained in fiscal year 2025 at about $4.0 billion or 1% of the GDP. That’s down from over $17 billion in FY22.
The country’s foreign exchange reserves, while still low, have recovered meaningfully in recent years, the credit rating agency added.
We estimate official gross reserves, including gold, rose to over $15 billion at June 2024, from nearly $10 billion at end-June 2023, and we expect them to rise to nearly $22 billion by FYE26, close to their 2021 peak.
Fitch also cited recent political and legal developments to conclude that former Prime Minister Imran Khan remains popular despite being in prison since May of 2023.
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