Pakistan’s economy is at a pivotal juncture, with recent structural reforms, monetary policies, and external financial support shaping its future trajectory. While key indicators such as inflation, foreign exchange reserves, and credit growth show signs of improvement, significant challenges remain. Fitch Ratings has highlighted that Pakistan’s ability to sustain these reforms and manage its external financing needs will be crucial in determining its credit outlook.

Fitch Ratings has emphasized that Pakistan’s commitment to structural reforms will play a crucial role in shaping its credit outlook in the years ahead. The country’s ability to implement and sustain these reforms will be essential for securing financial support from multilateral and bilateral sources, particularly the International Monetary Fund (IMF), as it works towards economic stability and strengthening foreign reserves.

Pakistan’s recent economic progress has been driven by key policy measures, including the State Bank of Pakistan’s decision to lower its policy rate to 12% on January 27, 2025. This adjustment reflects improved inflation control, with consumer price inflation dropping significantly to just over 2% year-on-year in January 2025—down from nearly 24% in the previous fiscal year.

According to the Pakistan Bureau of Statistics (PBS), the country’s inflation rate fell to 2.4% in January 2025, marking its lowest level in over nine years. This sharp decline from 4.1% in December 2024 highlights a continued trend of easing price pressures. On a monthly basis, the Consumer Price Index (CPI) rose by 0.2% in January, slightly higher than December’s 0.1% increase but considerably lower than the 1.8% surge seen in January 2024. The drop in annual inflation is attributed to a high base effect and declining food prices. For the first seven months of FY25, average inflation stood at 6.5%, a dramatic reduction from 28.73% during the same period in FY24. Inflation had previously peaked at 38% in May 2023, but consistent policy actions and government interventions have helped bring it down.

The Finance Division credited these policies for curbing inflation and stabilizing essential commodity prices. The declining inflation has also influenced monetary policy, leading the State Bank of Pakistan to cut its key interest rate by 100 basis points to 12% last month. This marks the sixth consecutive rate cut since June 2024, when the policy rate stood at a steep 22%.

Fitch Ratings has noted that Pakistan’s disinflation trend, coupled with exchange rate stability and a firm monetary policy, has helped ease domestic demand and reduce external financing needs, providing much-needed relief to the country’s financial situation. Looking ahead to FY25, Pakistan’s economic outlook appears promising, with Fitch projecting a 3.0% real GDP growth rate. The country has adapted to tighter policy measures, benefiting from lower interest rates, while private sector credit growth has turned positive in real terms for the first time since June 2022.

Pakistan’s current account position has also improved significantly, recording a surplus of around $1.2 billion in the six months leading up to December 2024, in contrast to the deficit seen in the previous fiscal year. This positive shift has been supported by strong remittance inflows, a rise in agricultural exports, and foreign exchange reforms.

Despite these gains, Fitch cautioned that Pakistan still faces notable external financing challenges. While foreign exchange reserves reached $18.3 billion by the end of 2024—enough to cover approximately three months of external payments—the country must navigate over $22 billion in public external debt maturing in FY25, including $13 billion in bilateral deposits.

Fitch expects key bilateral partners, including Saudi Arabia and the UAE, to roll over their financial commitments, but external liquidity remains a critical concern. The stability of Pakistan’s credit profile will largely depend on securing sufficient external funding and continuing structural reforms. The government has planned for $6 billion in multilateral financing for FY25, though much of this will be used to refinance existing debt.

Recent agreements, such as a $20 billion 10-year framework with the World Bank Group, signal positive momentum but will require careful execution. While fiscal reforms are progressing, Fitch warned that Pakistan could struggle to meet IMF targets, particularly in increasing tax revenues and enforcing agricultural income tax laws. Any delays in structural reforms could complicate economic stability.

For Pakistan’s credit rating to improve, Fitch highlighted the need for a sustained buildup of foreign reserves, further mitigation of external financing risks, and strict adherence to fiscal consolidation measures aligned with IMF requirements. However, setbacks in IMF program reviews or worsening external liquidity conditions could lead to negative rating actions.

In summary, Pakistan has made significant progress in tackling its economic challenges, but its future stability hinges on the continued implementation of reforms, securing external financing, and effectively managing upcoming debt repayments. The country’s reform agenda will play a crucial role in maintaining a stable credit outlook.

Pakistan has made notable progress in stabilizing its economy through policy interventions and financial reforms. However, the path forward depends on the successful implementation of structural reforms, securing external financing, and managing large public debt obligations. While there are positive signs of recovery, maintaining economic stability will require continued commitment to fiscal discipline and policy consistency. The coming months will be critical in determining Pakistan’s long-term financial outlook.