WEB DESK: In a positive development, S&P Global Ratings has upgraded Pakistan’s long-term sovereign credit rating from ‘B-’ to ‘B’, citing improvements in the country’s external position and gradual macroeconomic stabilization. The agency has maintained Pakistan’s short-term credit rating at ‘B’ and upgraded its transfer and convertibility rating to ‘B’ from ‘B-’, indicating increased confidence in the country’s ability to meet its debt obligations and facilitating easier currency exchange and fund transfers for foreign investors.
A country’s sovereign credit rating serves as a key indicator of its financial health and creditworthiness, influencing foreign investment and borrowing terms. An upgrade reflects a stronger perception of risk, encouraging international lenders to provide funds under more favorable conditions.
S&P attributed the rating change to Pakistan’s enhanced institutional capacity and successful implementation of reforms associated with the International Monetary Fund (IMF). The agency highlighted that these reforms have accelerated fiscal consolidation and strengthened external reserves.
The statement emphasized that Pakistan’s institutional framework has significantly improved over the past two years, notably with the approval of the IMF’s $7 billion Extended Fund Facility (EFF) in September 2024. This program played a crucial role in stabilizing the country’s economy and rebuilding foreign reserves, which have increased to $25.3 billion as of last month—up from a low of $6.7 billion in December 2022—covering upcoming external debt payments of $16.4 billion over the next year.
Pakistan has met most of the IMF program’s targets, allowing for timely disbursements, aided by a relatively stable political environment, according to the agency.
The boost in foreign reserves has been instrumental in restoring economic stability, with the reserves now sufficient to meet the country’s external obligations. Additionally, Pakistan’s access to multilateral, bilateral, and commercial funding sources is seen as diversifying and strengthening its external financing options.
The report also projected that Pakistan’s fiscal deficit could reduce to four percent of GDP by FY27, down from nearly 8 percent during the crisis years of 2022 and 2023, thanks to ongoing structural reforms. Despite inflationary pressures, the State Bank of Pakistan’s interest rates remain comparatively low, supporting economic growth and fiscal discipline.
S&P noted that if Pakistan’s commitment to reforms diminishes or external and fiscal indicators weaken, a downgrade could occur. Conversely, continued fiscal and external improvements—such as narrowing deficits and rising revenues—could lead to a further upgrade. Factors like reducing net external debt below 100% of current account receipts and lowering external financing needs could also positively impact the rating.
Awais Ashraf, research director at AKD Securities, praised the government’s reform efforts, highlighting strong tax revenue growth, prudent spending, and a boost from sustained remittances and IT exports. He pointed out that Pakistan’s foreign exchange reserves hit a record $18.4 billion in June, with external debt remaining stable over recent years.
Despite macroeconomic improvements, Ashraf observed that the Karachi Stock Exchange’s current valuation does not fully reflect the country’s economic prospects. For instance, the KSE-100 index’s forward earnings multiple is at 7.6, compared to 9.9 during the last upgrade. Market dividend yields are also higher, at nearly 7%, offering attractive returns compared to previous periods.
Recently, Barclays upgraded Pakistan’s dollar bonds to “overweight,” signaling confidence in the country’s debt prospects following improved oil market conditions. Meanwhile, Fitch Ratings reaffirmed Pakistan’s ‘B-’ rating with a stable outlook in April but noted lingering risks related to global energy prices and foreign exchange reserves.
Last year, S&P upgraded Pakistan’s rating from ‘CCC+’ to ‘B-’ and maintained a stable outlook, reflecting the country’s ongoing economic recovery.
