By Moaaz Manzoor

S&P Global Ratings raised Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-’, citing stronger institutional capacity, improved foreign exchange buffers and faster fiscal consolidation following the implementation of key economic reforms.

The rating agency maintained a stable outlook, affirmed Pakistan’s short-term sovereign rating at ‘B’ and raised its transfer and convertibility assessment to ‘B’ from ‘B-’. It said the stable outlook reflected expectations that improved institutional settings would support continued reforms, steady economic growth and fiscal consolidation.

According to the S&P assessment, the upgrade was underpinned by Pakistan’s progress in implementing reforms under the International Monetary Fund programme, which helped rebuild external buffers and reduce pressure on the government’s finances.

Pakistan secured a $7 billion Extended Fund Facility from the IMF in September 2024. S&P said the country had met most programme targets, allowing timely IMF disbursements, while greater political and institutional stability supported the reform process.

The improvement was most visible in the external position. Pakistan’s foreign reserves, including the central bank’s gold holdings, increased to $25.3 billion at the end of June 2026 from a multi-year low of $6.7 billion in December 2022.

S&P said the reserve level exceeded the government’s estimated external principal repayments of $16.4 billion over the following 12 months. It nevertheless expected Pakistan to continue relying on official financing and the rollover of bilateral and commercial credit facilities to meet its wider external funding requirements.

Pakistan also returned to international capital markets in April 2026 after a four-year absence. The country raised $750 million through a Eurobond and issued its first panda bond worth 1.75 billion Chinese yuan, equivalent to about $250 million.

S&P said multilateral and bilateral funding, together with renewed access to commercial borrowing, had broadened Pakistan’s external financing options.

Fiscal consolidation was the second major factor supporting the upgrade. Government measures increased tax revenue by 3.2 percentage points of gross domestic product during the 12 months ended June 2025, while revenue collection maintained momentum during FY2025-26.

The agency estimated that the general government deficit narrowed to 4% of GDP in FY2025-26 from 7.9% in FY2021-22. It expects the deficit to remain at around 4% in FY2026-27, compared with the government’s budget target of 3.6%.

S&P projected net general government debt to decline gradually from 64.5% of GDP in FY2025-26 to 60.3% by FY2028-29.

However, debt servicing remains a major weakness. Interest payments were estimated at 42.1% of government revenue in FY2025-26, although S&P expects the ratio to decline as financing costs moderate. It said Pakistan’s interest burden remained among the highest of the sovereigns it rates.

On economic performance, S&P estimated that Pakistan’s economy expanded by 3.6% in FY2025-26, marking a third consecutive year of growth after the contraction recorded in FY2022-23.

It projected GDP growth of 3.5% in FY2026-27, supported by reform implementation and activity in the industrial and services sectors. Inflation averaged 7.2% in FY2025-26, up from 4.5% in the preceding fiscal year but well below the 23.4% recorded in FY2023-24.

Despite the upgrade, S&P said Pakistan remained exposed to high external financing needs, elevated public debt, security risks and continued dependence on support from bilateral and multilateral partners.

A further upgrade would require sustained structural improvement, including narrower fiscal deficits, net government debt falling below 60% of GDP and stronger external indicators.

The rating action reflects Pakistan’s progress in rebuilding reserves and reducing fiscal imbalances since the severe pressures of 2022 and 2023. Hence, sustaining the improved rating will depend on maintaining reform momentum while reducing debt-servicing and external-financing vulnerabilities.

Credit: INP-WealthPk