Fitch has upgraded Pakistan’s long-term foreign currency issuer default rating from CCC+ to B- which means that the country has transited from the substantial credit risk to highly speculative category.

This signals an improvement in our economic health. It may be added here that Fitch had raised Pakistan’s rating from CCC to CCC+ in July 2024, soon after the government secured a staff level agreement on the Extended Fund Facility programme. But both these two ratings reflected substantial credit risk with default as a distinct possibility. Moody’s had also upgraded Pakistan’s rating from Caa3 to Caa2 in August 2024 on the assumption that the IMF Board would approve the SLA that the rating agency defined as junk and highly speculative.

Moody’s has yet to upgrade the rating this year. However, it should be noted here that Fitch B- rating is considered to be equivalent to Moody’s B3 rating. In other words, Moody’s will have to upgrade two notches from Caa2 to Caa1 and then to B- to give a comparable rating to Pakistan. Interestingly, the third major international rating agency, Standard and Poor (S&P), has kept Pakistan rating unchanged at CCC+ since October 2022 though it issued a report on the country in July 2024 considered equivalent to Moody’s Caa1 and Fitch’s CCC.

But a word of caution is relevant here. Fitch upgrade is based on the assumption that Pakistan will continue to access external funding with the fulfilment of IMF conditions such as quantitative timebound structural benchmarks as well as reforms. Subsequent to the Fitch upgrade, it is important to remember that for this revaluation to be sustainable in the medium to long term the managers of the national economy must remain vigilant against any backslide on the reform agenda as laid down by the IMF.

As things stand, the signs are hopeful. State Bank of Pakistan Governor Jameel Ahmed, in his recent address at the Pakistan Stock Exchange, highlighted three positive economic indicators. First, remittance inflows reached a historic high of 4 billion dollars in March which when projected for the current year would amount 38 billion dollars. The Finance Division monthly update and outlook for March noted July-February exports of 21.82 billion dollars as opposed to remittances of 23.96 billion dollars. Secondly, the Governor mentioned the low inflation rate (0.7 percent last month). Thirdly, the Governor pointed to rising investor confidence based on a survey by the SBP which in its latest monetary policy statement said: “Latest pulse surveys show improved consumer and business confidence”.

But there are many areas which are still exposed to risks. One is the lacklustre performance of the large-scale manufacturing sector (LSM), with recent data suggesting that the contraction in February this year was negative 1.90 percent. The drag in LSM growth is mainly coming from a few low-weight sub-sectors, which have more than offset the positive momentum in key sub-sectors like textiles, pharmaceuticals, automobiles and POL.

Another moot issue is whether the rise in remittance inflows is sustainable. It is relevant to mention here that in March two major factors accounted for a rise in inflows; notably, it was the holy month of Ramazan when remittances are traditionally higher than in other months and the border-crossing with Afghanistan and Iran remained closed for most of the month which stemmed the outflows for the time being.

On the other hand, inflation outlook is subject to risks emanating mainly from volatility in food prices, timing and magnitude of energy price adjustments, additional revenue measures, protectionist policies in major economies and uncertain outlook of global commodity prices. No doubt, foreign exchange reserves have gone up and the risk of default has receded. But the sustainability of both these positive indicators is subject to the country remaining on an International Monetary Fund (IMF) programme. About 16 billion dollars of roll-overs are a major component of the reserves, which would dry up as the three roll-over countries – China, Saudi Arabia and the UAE – have made it repeatedly clear to the government that an extension is subject to the country being on a rigid IMF programme. Again, the Fund wants the government to tax traders and the rich farmers effective January 2025 to be implemented from 1 July 2025. But this is a politically challenging task.

Macroeconomic stability is a claim that is repeatedly echoed by the cabinet ministers as well as by stakeholders but the common man has not benefited from the decline in inflation due to a wage freeze in the private sector. The plight of the common man can be gauged from the fact that Pakistan is currently suffering a poverty level of 42 percent as per the World Bank figures. Macroeconomic stability in the given conditions is highly unstable until the government girds up its loins and finds an indigenous solution to its problems instead of depending on foreign loans. The long-term remedy lies in cutting current expenditure and going for industrialisation and export growth in a big way.