Fitch has upgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to CCC+ from CCC, following the South Asian country’s new deal with the International Monetary Fund.
“The upgrade reflects greater certainty over the continued availability of external funding, in the context of Pakistan’s staff-level agreement (SLA) with the IMF on a new 37-month $7 billion extended fund facility (EFF),” the agency said on Monday.
Previously, the global credit rating agency had rated Pakistan’s credit at the ‘CCC’ level, which is considered a speculative or “junk” grade, indicating a high risk of default. Fitch noted that the upgraded CCC+ rating still represents significant country credit risk.
But the agency raised the rating to CCC+ on Monday, citing greater certainty over Pakistan’s access to external funding.
The rating upgrade is linked to the country’s recently finalised staff-level agreement with the IMF on a new 37-month, $7 billion extended fund facility. The new IMF programme is expected to help Pakistan cement macroeconomic stability and set the stage for stronger, more inclusive and resilient economic growth, according to the IMF.
According to Fitch, Pakistan’s effective performance under its previous IMF agreement helped narrow fiscal deficits and rebuild foreign exchange reserves - improvements that are expected to continue. It also warned that the country would “remain vulnerable if it fails to implement challenging reforms” going forward.
Fitch noted that the upgraded rating assumes Pakistan would be able to secure around $4 to $5 billion in new funding assurances from its key bilateral partners, such as Saudi Arabia, the UAE, and China, by the end of August.
The rating agency expressed confidence that Pakistan would be able to obtain such funding commitments, given the country’s strong track record of support from these partners as well as the significant policy measures introduced in its latest annual budget.
Fitch also acknowledged the ambitious reform agenda laid out by the government, which aims to tackle longstanding structural weaknesses in the tax system, energy sector, and state-owned enterprises. The agency highlighted the government’s commitment to exchange rate flexibility and improvements in the monetary policy framework as positive steps.
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The rating agency commended the government’s target of increasing the tax-to-GDP ratio by three percentage points from the current level of under 9% in the fiscal year 2024. This will involve raising taxes on the influential agricultural sector, which will require legislation at the provincial level.
While global credit rating agency has upgraded Pakistan’s credit rating to CCC+, it noted that the country’s foreign exchange reserves, though recovering, remain low compared to historical levels.
According to Fitch, Pakistan’s official gross reserves, including gold, have risen to over $15 billion as of June 2024, equivalent to around three months of imports. This is up from nearly $10 billion at the end of June 2023.
