S&P Upgrades Pakistan Rating to 'B', Outlook Stable

KARACHI: S&P Global Ratings has upgraded Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-‘, citing stronger institutional capacity, sustained economic reforms, improving fiscal performance, and a significant recovery in foreign exchange reserves.

The agency assigned a stable outlook, reflecting confidence that ongoing reforms will support steady economic growth and fiscal consolidation.

S&P also affirmed Pakistan’s short-term sovereign rating at ‘B’ and raised the country’s transfer and convertibility assessment to ‘B’ from ‘B-‘.

The rating agency said Pakistan has strengthened its institutional framework over the past two years, enabling the successful implementation of key reforms under the International Monetary Fund’s (IMF) $7 billion Extended Fund Facility (EFF) approved in September 2024.

Pakistan has met most IMF program targets, allowing timely disbursements and helping restore macroeconomic stability it said adding that a relatively stable political environment has played an important role in advancing these reforms.

The agency highlighted the sharp improvement in Pakistan’s external position, noting that foreign exchange reserves, including the State Bank of Pakistan’s gold holdings, increased to $25.3 billion at the end of June 2026, compared with $6.7 billion in December 2022.

It said the reserve level is sufficient to cover the government’s external principal repayments of $16.4 billion over the next 12 months.

It further said that S&P also pointed to Pakistan’s return to international capital markets in April 2026 after a four-year gap through a $750 million Eurobond and its inaugural CNY1.75 billion panda bond, saying these developments have diversified the country’s external financing sources alongside continued multilateral and bilateral support.

On the fiscal front, the ratings agency credited the government’s structural reforms for accelerating fiscal consolidation. It noted that tax revenues rose by 3.2 percentage points of GDP during the year ending June 2025 and maintained strong momentum in fiscal year 2026.

S&P forecast Pakistan’s general government fiscal deficit to narrow to 4 per cent of GDP in fiscal 2027, down from nearly 8 per cent of GDP during the crisis years of fiscal 2022 and 2023. It also projected that the increase in the net general government debt-to-GDP ratio would average 4.2 per cent over fiscal years 2026 to 2029.

The State Bank of Pakistan tightened monetary policy in April 2026 due to inflationary pressures linked to the Middle East conflict, S&P said interest rates remain well below previous peaks.

As a result, it expects government interest payments to decline to an average of 38 per cent of government revenue over the next three years, compared with more than 60 per cent in fiscal 2024. However, it noted that Pakistan’s debt-servicing burden remains among the highest for rated sovereigns.

The stable outlook reflects S&P’s expectation that Pakistan’s improved institutional environment will sustain economic reforms, strengthen fiscal discipline, and ensure continued access to official external financing and commercial borrowing.

The agency said it could downgrade Pakistan if fiscal consolidation weakens, external indicators deteriorate, or financing support from bilateral and multilateral partners declines, placing pressure on foreign exchange reserves. It also warned that a sharp rise in interest rates that significantly increases debt-servicing costs could signal domestic financing stress.

Conversely, S&P said Pakistan’s rating could be upgraded further if fiscal deficits continue to narrow, government debt falls below 60% of GDP, revenues continue to rise, financing costs moderate, and external debt and financing metrics improve on a sustained basis.