Fitch’s recent upgrade of Pakistan’s long-term foreign currency issuer default rating from CCC+ to B- offers a cautious nod to the country’s economic trajectory, shifting its status from “substantial credit risk” to “highly speculative.”
This move reflects confidence in Pakistan’s ability to secure external funding by adhering to the IMF’s rigorous, politically sensitive conditions. However, Fitch tempers its optimism with concerns about a weaker-than-expected electoral mandate for Prime Minister Shehbaz Sharif’s coalition and Pakistan’s spotty track record of IMF compliance across administrations. While the upgrade signals potential for accessing affordable loans and issuing debt instruments, Pakistan’s economic challenges are deeply tied to an elite class that continues to dominate budgetary resources, raising questions about the sustainability of this progress.
This B- rating suggests material default risks persist, but there’s now a sliver of breathing room, though the capacity to keep up payments could falter if economic or business conditions worsen. Skeptics might highlight ongoing struggles, like the large-scale manufacturing sector’s decline—recent data shows a 1.9% contraction in February this year—or the International Monetary Fund’s (IMF) likely refusal to ease up on tough fiscal measures. These include a contentious tax on traders and agricultural taxes already passed by all four provincial assemblies, set to kick in from July 1, with full effect by January 1. Yet, this upgrade is a clear win. It could pave the way for Pakistan to secure commercial loans at more affordable rates and tap into debt instruments like Sukuk or Eurobonds.
One path forward for the government is to trim its ballooning current expenditure—a non-growth, inflationary burden that keeps climbing year after year. To taxpayers, this feels like their hard-earned money is funneled toward an elite few, reinforcing perceptions of unfair resource capture. Fitch had previously nudged Pakistan’s rating from CCC to CCC+ in July 2024, shortly after the government clinched a staff-level agreement for the IMF’s Extended Fund Facility. Both those ratings, however, still pointed to significant credit risk with default as a tangible threat. Meanwhile, Moody’s bumped Pakistan’s rating from Caa3 to Caa2 in August 2024, banking on IMF Board approval of the agreement. Moody’s labeled this rating as “junk” and highly speculative, and they’ve yet to issue a new rating in 2025. For context, Fitch’s B- aligns roughly with Moody’s B3, meaning Moody’s would need to climb two steps—from Caa2 to Caa1, then to B3—to match Fitch’s current assessment. Standard & Poor’s (S&P), the third major global rating agency, has held Pakistan steady at CCC+ since October 2022. Their July 2024 report on the country aligns with Moody’s Caa1 or Fitch’s CCC, showing no change in their outlook.
This Fitch upgrade, while cautious, offers a glimmer of optimism for Pakistan’s economic path, provided it can navigate the tightrope of fiscal discipline and external pressures. Whether Moody’s and S&P will follow Fitch’s lead and upgrade Pakistan’s rating remains uncertain, but even if they do, Pakistan would still linger at the lower rungs of the “highly speculative” category. For now, Fitch’s upgrade signals confidence in Pakistan’s ability to secure external funding, hinging on the country’s unwavering commitment to the IMF’s stringent, politically fraught conditions. These include time-bound quantitative targets, structural benchmarks, and reforms critical not only for clinching a staff-level agreement on the second IMF review but also for sustaining the $16 billion in rollovers from three friendly nations. Since 2019, these countries have made it clear: Pakistan must stay enrolled in an active IMF program, no exceptions.
Pakistan has no choice but to push through these reforms—IMF-mandated or otherwise—with no room for retreat. Fitch’s optimistic outlook rests squarely on this resolve, but the agency flagged two troubling caveats. First, it noted that the PML-N and its allies secured a weaker-than-expected mandate in the 2024 elections, despite holding a constitutional majority in the National Assembly. Second, Fitch pointed to a checkered history of IMF program compliance, with governments across the political spectrum often failing to follow through or reversing reforms.
The root of Pakistan’s economic woes lies less in who holds power and more in the persistent influence of an elite class, actively courted by every administration. These elites continue to command hefty budgetary allocations year after year, draining resources that could otherwise drive sustainable growth. Without a voluntary sacrifice from these major budget beneficiaries, the gains from Fitch’s upgrade may prove fleeting, casting doubt on Pakistan’s ability to maintain this progress in the medium to long term.
In conclusion, Fitch’s upgrade marks a tentative step toward economic stability for Pakistan, but its longevity hinges on unflinching commitment to IMF reforms and sustained external funding, including $16 billion in rollovers from friendly nations. Yet, the persistent grip of an elite class, siphoning off substantial budgetary allocations, remains a formidable barrier. Unless these influential beneficiaries relinquish their disproportionate share, the gains from this upgrade risk unraveling, leaving Pakistan’s economic future precarious despite the current flicker of optimism.