ISLAMABAD: The Standard & Poor’s (S&P) Global Ratings on Wednesday raised its long-term sovereign credit rating for Pakistan to ‘B’ from ‘B-’, saying that the upgrade is predicated on improved institutional stability that has helped to implement critical International Monetary Fund (IMF) program reforms.
These reforms have quickened fiscal consolidation and rebuilt external buffers, the ratings agency added.
“We believe Pakistan has strengthened institutional capacity, demonstrated through the implementation of critical reforms. This has bolstered the country’s foreign exchange reserves and alleviated pressure on external credit metrics,” the ratings agency added.
It further stated that the government’s efforts to expand its revenue base have hastened the pace of fiscal consolidation, facilitating a steady decline in its net general government debt to GDP ratio.
“We therefore raised our long-term sovereign rating on Pakistan to ‘B’. At the same time, we affirmed the ‘B’ short-term rating, said the ratings agency, adding that the stable outlook reflects our expectations that improved institutional settings will anchor economic reforms to bring about a sustained period of steady growth and fiscal consolidation.
The outlook is stable. It also affirmed the ‘B’ short-term sovereign credit rating.
The stable outlook reflects our view of Pakistan’s improved political and institutional settings. Entrenched economic reforms will bring about a sustained period of steady growth and fiscal consolidation.
We anticipate sustained official financing will support Pakistan in meeting its external obligations and that the country will continue to roll over its commercial credit lines over the next 12 months.
The report further stated: “We may lower our ratings if, contrary to our expectations, Pakistan’s current external or fiscal indicators deteriorate as a result of a diminished commitment to fiscal consolidation. This could erode financial support from key bilateral and multilateral partners, pressuring usable foreign exchange reserves.”
Furthermore, if interest rates surge again, materially adding to the government’s already-heavy debt servicing burden, we would view that as an indication of domestic financing stress, it added.
“We may raise the ratings if we believe Pakistan’s fiscal and external metrics continue to strengthen structurally. This could happen if the country’s fiscal deficits narrow such that the change in net general government debt is less than 3 percent of GDP on a sustained basis. Simultaneously, government revenue would need to continue rising while financing costs moderate, with strong expenditure controls. Such a scenario will be accompanied by net general government debt falling below 60 percent of GDP.
Concurrently, improvements in Pakistan’s external indicators resulting in narrow net external debt falling below 100 percent of current account receipts, and gross external financing needs declining to less than 100 percent of the sum of current account receipts and usable reserves, may see the ratings raised, it added.
Our upgrade on Pakistan is predicated on improved institutional stability that has helped to implement critical IMF program reforms.
These reforms have quickened fiscal consolidation and rebuilt external buffers.
The institutional settings of Pakistan have strengthened over the last two years. The passage of the IMF’s Extended Fund Facility (EFF) USD 7 billion program in September 2024 has been critical in restoring macroeconomic stability to the country and replenishing foreign reserves. Thus far, Pakistan has met most of the EFF program targets, which has allowed for timely IMF disbursements. A relatively stable political environment has been instrumental in this regard.
The IMF program, along with strong support from bilateral partners, has considerably boosted foreign reserves. As of end June 2026, foreign reserves (including the central bank’s gold holdings) had climbed to USD 25.3 billion, from a multi-year low of USD 6.7 billion in December 2022. This is more than sufficient to cover the government’s external principal payments of USD 16.4 billion over the next 12 months.
In April 2026, Pakistan entered international capital markets for the first time in four years with a Eurobond placement of USD 750 million and an inaugural panda bond issuance of Chinese Yuan (CNY) 1.75 billion (equivalent to about USD 250 million).
The ratings believe multilateral and bilateral funding, coupled with continued access to commercial borrowing, will diversify Pakistan’s external funding options.
The pace of fiscal consolidation has accelerated due to the government’s commitment to structural reforms. The government was able to significantly increase tax revenues by 3.2 percentage points of GDP in the 12 months to June 2025. The tax revenue collection has continued this momentum in fiscal 2026 (ended June 30, 2026). Alongside expenditure controls, we forecast the general government deficit at 4 percent of GDP in fiscal 2027, down from close to 8 percent in the crisis years of fiscal years 2022 and 2023. “We project the change in the ratio of net general government debt to GDP will average 4.2 percent for fiscal 2026-2029,” it added.
State Bank of Pakistan (SBP) tightened monetary conditions in April 2026 on the back of rising inflationary pressures from the Middle East conflict. Nevertheless, domestic interest rates remain much lower than in previous years. “We therefore forecast government interest payments to decline to an average of 38 percent of revenue over the next three years, from a peak of above 60 percent in fiscal 2024. That said, Pakistan’s ratio of interest servicing to revenue remains among the highest globally of rated sovereigns.”
S&P ratings added that Pakistan’s economy grew in fiscal 2026 for a third consecutive year, following a contraction in fiscal 2023. We project growth at 3.5 percent in fiscal 2027, supported by IMF program reforms alongside marginal price pressures due to an energy shock in the wake of the Middle East conflict. Political stability has bolstered the government’s capacity for the implementation of reforms.
Pakistan’s economy grew by 3.6 percent in fiscal 2026 on the back of industry and services sector growth. Agriculture sector growth, a critical sector accounting for 23 percent of economic output, demonstrated resilience despite floods in the first quarter of fiscal 2026. Pakistan will maintain GDP growth of 3.5 percent in fiscal 2027 as reforms lift economic activity, it added.
Inflationary pressures have increased in the second half of fiscal 2026 on the back of higher energy prices emanating from the Middle East conflict. Consumer price index growth came in at 7.2 percent for fiscal 2026, higher than 4.5 percent in the previous fiscal year, but substantially lower than the 23.4 percent in fiscal 2024. We forecast the index will settle at 6.5 percent by fiscal 2029 as global energy markets return to normalcy.
The Pakistani rupee’s depreciation against the US dollar in recent years has contributed to a sustained stagnation in the country’s nominal GDP per capita. This reversed in fiscal 2026, with the rupee appreciating against the US dollar. Coupled with continued real growth momentum, we forecast GDP per capita will be close to USD 2,000 in fiscal 2027.
Pakistan and the IMF agreed to an EFF that approved financial support of USD 7 billion in September 2024 over 37 months. The performance requirements of the program are a continuation and extension of those set in the USD 3 billion standby arrangement with the IMF, which the government completed in April 2024. In May 2025, the IMF approved the Resilience and Sustainability Facility (RSF) for Pakistan, with access of USD 1.4 billion.
The IMF completed the third review of Pakistan’s EFF-tied economic reform program and the second review of the RSF arrangement in May 2026. The meeting of the program targets facilitated a disbursement of USD 1.1 billion under the EFF and USD 220 million under the RSF, bringing total disbursement to date to USD 4.5 billion. In our view, these disbursements, in combination with new and rollover deposits from bilateral partners, have helped to rebuild Pakistan’s foreign exchange reserves from critical lows.
The political uncertainties in Pakistan have somewhat subsided.
Since the February 2024 general elections, the coalition government has been able to advance reforms and meet IMF program targets without significant social pressure. The progress on the implementation of the reforms suggests an enhanced capacity to maintain expenditure controls and expand the tax revenue base. This improved stability marks a departure from the political flux following the April 2022 dismissal of former Prime Minister Imran Khan that had hindered the government’s ability then to address economic challenges.
Pakistan remains subject to domestic and external security risks. The country’s security situation has improved since the early 2010s, but the potential to deteriorate remains. Border tensions with India and Afghanistan, as apparent in the recent outbreak of hostilities over the past year, can raise the specter of miscalculations and accidental clashes that could worsen credit risks.
The ratings agency further said that fiscal consolidation efforts to continue, supported by structural reforms. Interest costs continue to consume a large proportion of government receipts.
Continued bilateral and multilateral aid, alongside international bond issuances, have shored up usable foreign exchange reserves, following a steep decline in fiscal 2023.
The pressures on Pakistan’s fiscal and external positions have lessened, in contrast with conditions in fiscal years 2022 and 2023. The government has implemented a series of measures to expand the tax base. This includes tax initiatives like the Agriculture Income Tax and the widening of the tax net to bring in more registrants in the retail sector.
These efforts led to a significant increase in government revenue by 3.2 percentage points of GDP over the 12 months ending June 2025.
We project the ratio of general government revenue to GDP at 15.8 percent in fiscal 2026, a similar level to the year before and substantially higher than the 12.6 percent in fiscal 2024. As a result, we estimate the fiscal deficit to have narrowed to 4 percent of GDP in fiscal 2026 from 7.9 percent in fiscal 2022, it added.
“We do not anticipate volatile energy prices to impose a hefty fiscal cost on the government. Other than measures to mitigate energy demand, the government is allowing price pass-through, with targeted subsidies to help vulnerable groups. In the recently passed fiscal 2027 budget, the government has set a target to cut the budget deficit to 3.6 percent of GDP. But we believe the government may face political and social pushback to trim its deficits more quickly. We forecast the general government’s fiscal 2027 deficit to remain stable at about 4 percent of GDP. As a result, Pakistan’s average annual change in net general government debt will average 4.2 percent of GDP over fiscals 2026-2029,” said S&P ratings.
We project Pakistan’s ratio of net government debt to GDP to gradually decline amid fiscal consolidation efforts. That said, the ratio is likely to remain fairly high at over 60 percent of GDP over the forecast period. Notably, the main pressure on the country’s debt sustainability is the extremely high interest expense relative to fiscal revenue. This is a major constraint on our assessment of the government’s debt burden.
We anticipate lower funding costs and a stable rupee to gradually bring down this ratio to 39.5 percent in the current fiscal year, from 42.1 percent the prior year.
The government’s heavy interest burden arose from historically high domestic interest rates. SBP undertook aggressive monetary policy tightening to tame surging inflation of over 20 percent annually during fiscal years 2023 and 2024. With inflationary expectations better anchored, the central bank had implemented rate reductions of 1,150 basis points from June 2024 to December 2025. After elevated inflationary pressures from energy prices in March 2026, the SBP increased the policy rate by 100 basis points in April, bringing it to 11.5 percent. The government, which had eschewed long-term debt issuance during the period of high rates, has started to re-profile its debt stock from short-term paper to longer-dated bonds.
Inflows of external financial aid continued to stabilise the country’s external position in fiscal 2026. Support from bilateral creditors, including China, Saudi Arabia, and Kuwait, has been critical for Pakistan to meet its high external financing needs. The total support from these partners in the form of central bank deposits and swaps reached USD 16.8 billion as of end-fiscal 2026; we add this sum to the government’s total stock of debt.
In April 2026, Pakistan repaid USD 3.45 billion to the United Arab Emirates upon deposit withdrawal. Saudi Arabia extended USD 3 billion in additional deposits to plug the gap, bringing its total aid to USD 8 billion. We expect Pakistan to continue relying on the renewal of existing bilateral credit and commercial loan facilities, as well as on the potential extension of new ones.
In this context, the progress of the IMF program has drawn in other multilateral and bilateral financiers to resume their aid to Pakistan. In January 2025, the World Bank approved a 10-year Country Partnership Framework with Pakistan, committing USD 20 billion in funding. The financing through this framework is in the first phase, with USD 375 million approved in July 2026 for Pakistan’s Grid Stability Enhancement Project to strengthen the national power transmission network.
Nevertheless, additional deposits or loans from external partners would further add to Pakistan’s substantial narrow net external debt position. We forecast the narrow net external debt to reach 113 percent of current account receipts by the end of this fiscal year.
We estimate Pakistan’s current account was in a small deficit of 0.4 percent of GDP in fiscal 2026, underpinned by robust growth in remittances while weighed down by a higher import bill due to elevated energy prices. This is against the backdrop of elevated current account deficits in the last few years, particularly a high shortfall of 4.7 percent of GDP in fiscal 2022. We expect current account deficits to be modest at an average of 0.9 percent of GDP from fiscal 2027 through fiscal 2029.
That said, Pakistan’s continued external debt maturities will place sustained pressure on its foreign exchange reserves, absent considerable net new funding. Consequently, gross external financing needs, as well as net external indebtedness, will remain high over the next one to two years.
Pakistan’s banking system is modest in scale by international standards. Total bank assets comprise about 57 percent of GDP. S&P Global Ratings does not publish a Banking Industry Country Risk Assessment on Pakistan.
Despite the banking system’s large exposure to the sovereign, the sector is, in our opinion, stable, liquid, and adequately capitalised. Combining Pakistan’s government-related entities and its financial system, we assess the country’s contingent fiscal risks as limited. That said, Pakistan’s banking system bears an outsized exposure to the sovereign, which accounts for more than half of scheduled banks’ total outstanding credit.
In 2022, Pakistan amended the SBP Act, which affords additional independence to the central bank, in line with IMF program objectives. The central bank’s autonomy and performance have strengthened since the establishment of a monetary policy committee for rate-setting in January 2016. Total SBP holdings of government securities have fallen over the past few years because the central bank has stopped providing new financing to the government.
This has strengthened the central bank’s capacity to focus on fighting inflation; in our view, it added.
Copyright Business Recorder, 2026
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