Fitch Ratings has affirmed Pakistan’s Long-Term Foreign-Currency Issuer Default Rating at ‘B-’ with a stable outlook, citing steady progress on fiscal consolidation and macroeconomic stability, while warning of persistent external risks.

In a statement on Monday, the agency said Pakistan’s alignment with its International Monetary Fund programme continues to support funding capacity and policy discipline.

“Foreign exchange (FX) buffers rebuilt over the past year provide a cushion against the economic impact of the war in the Middle East, while Pakistan’s role as a ceasefire broker may provide tangible benefits and partly offset external pressures.”

However, Fitch cautioned that the country remains highly exposed to global energy price shocks, which could erode FX reserves.

The agency said Pakistan’s IMF programme remains a central policy anchor. Authorities reached a staff-level agreement in March 2026 on the third review of the Extended Credit Facility and the second review of the Resilience and Sustainability Facility, which could unlock $1.2 billion pending board approval.

“The programme will continue to provide a key policy anchor, particularly for the fiscal framework, and will help mobilise additional multilateral and bilateral support,” Fitch said.

Fitch highlighted Pakistan’s structural vulnerability to energy disruptions.

“Pakistan sources up to 90% of its oil from the Gulf and has limited storage capacity, creating high exposure to the Middle East conflict and constricted energy supply via the Strait of Hormuz.”

It noted that fuel subsidies introduced since early March have been financed through budget reallocations, while higher pump prices and a shift to targeted support from April have helped contain costs.

“We expect the overall impact on the fiscal deficit to be contained, as the government is likely to cut other spending.”

Inflation is expected to rise in the coming months due to higher global energy prices and base effects.

“We expect inflation to average 7.9% in FY26 (ending 30 June 2026), above the FY25 level but well below the 23.4% in FY24.”

The State Bank of Pakistan cut the policy rate to 10.5% by end-2025 from 22.0% in May 2024, easing borrowing costs. However, interbank rates rose to around 100 basis points above the policy rate by early April amid inflation concerns linked to tight energy supply.

“The shock will detract from GDP growth, but we still expect growth of 3.1% in FY26, up slightly from 3.0% in FY25, due to improved confidence from lower borrowing costs.”

Fitch projects external debt amortisations will increase to $12.8 billion in FY26, from nearly $8 billion in FY25. A $3.5 billion deposit was repaid to the United Arab Emirates in April.

“Our amortisation projections exclude another $9.2 billion in bilateral deposits and loans we expect to be rolled over.”

The agency said financing will rely mainly on IMF, multilateral, and bilateral inflows, alongside commercial borrowing. Pakistan also plans to issue a panda bond this fiscal year.

“We expect the primary surplus to narrow to 2.1% of GDP in FY26, 0.3pp below the official target.”

It attributed this to rising non-interest expenditures and constraints in sustaining tax revenue gains.

“We expect the primary surplus to shrink further in FY27 as extraordinarily high SBP dividends are unlikely to continue in our view, while lower interest payments as a share of GDP will help keep fiscal deficits stable at about 5.3% of GDP.”

Fitch expects the current account to shift back to a deficit of 1.1% in FY26 from a surplus of 0.5% in FY25, with FX reserves declining modestly.

“We expect the current account deficit, and repayment of a $1.3 billion Eurobond and the UAE deposits in April to bring FX reserves down to $21.3 billion by the end of FY26.”

“This will cover 2.9 months of current external payments, from $22.6 billion at the end of FY25. Net FX reserves remain negative, reflecting FX reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP.”

Fitch also noted rising tensions between Pakistan and Afghanistan since February 2026.

“Our baseline does not include further escalation, given Pakistan’s financing constraints, but the conflict presents a considerable risk to its commitment to fiscal consolidation.”