S&P explains how Pakistan's rating can be improved

ISLAMABAD: Pakistan could secure further sovereign credit rating upgrades if it sustains fiscal consolidation and strengthens its external position, with a fiscal deficit below 3 percent of GDP and government debt falling below 60 percent among key benchmarks, according to Director of Sovereign Credit Ratings at S&P Global Ratings, Yee Farn Phua.

Phua said Pakistan’s improved political stability had been a key factor behind the country’s recent upgrade to ‘B’, allowing the government to implement critical reforms under the International Monetary Fund (IMF) programme, improve fiscal management and strengthen institutional capacity.

Speaking on a state-owned digital platform, Phua said S&P’s decision to upgrade Pakistan reflected a combination of relatively more stable political conditions, progress on IMF-backed reforms and improvements in the country’s fiscal and external position.

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S&P Global Ratings raised Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-’ on July 22, with a stable outlook, taking the rating to its highest level since 2016. “This was predicated on the fact that we view Pakistan’s political settings as relatively more stable,” Phua said.

He said greater stability had enabled the government to undertake reforms considered critical to restoring macroeconomic stability. “This has allowed the country to implement very critical IMF reforms that have stabilised the fiscal position,” he said.

Phua also linked the relatively stable political environment with an improvement in institutional capacity. “Because of the more stable political settings, institutional capacity has also improved as well,” he said.

Pakistan has been implementing fiscal and structural measures under its IMF programme, including steps aimed at strengthening revenue mobilisation, containing expenditure and improving the country’s external position. Phua said Pakistan’s bilateral partners had also resumed financial support, including swap arrangements and deposits with the State Bank of Pakistan (SBP).

“We are also seeing that bilateral partners have started to come in with swap lines, and deposits also at the State Bank of Pakistan,” he said. Improved tax collection and expenditure management had contributed to stronger fiscal performance, he added. “The fiscal targets, we noticed, have been improving,” Phua said. Asked what had changed since Pakistan faced severe economic pressures in 2022, Phua again pointed to greater political stability as an important factor behind the improvement in the country’s credit metrics and growth outlook.

“The cornerstone of all these credit metrics, and also now more stable growth, is really due to the more relatively stable political settings,” he said. According to Phua, the improved environment has provided policymakers greater room to undertake measures with a longer-term horizon instead of remaining focused primarily on immediate economic pressures.

“This has also allowed policymakers to put in place measures that are more long-term in nature,” he said. The assessment comes as the government seeks to consolidate macroeconomic stability while increasing trade and investment engagement with bilateral partners. Islamabad has been pursuing investment in areas including mining, energy, information technology and manufacturing as part of its broader push towards export-led growth and greater private-sector participation.

Pakistan has also sought to translate longstanding diplomatic relationships into greater trade, investment and market access. Economic engagement with Türkiye, China and other partners has increasingly focused on investment and commercial cooperation alongside traditional government-to-government ties.

Phua said further improvement in Pakistan’s sovereign rating would depend particularly on sustained strengthening of its fiscal and external indicators. “It will be basically fiscal and external metrics continuing to strengthen together,” he said.

Among the important thresholds, he identified a fiscal deficit of less than 3 per cent of GDP on a sustained basis. “If we see that the country’s fiscal deficits are less than 3 percent of GDP on a sustained basis,” Phua said.

Government debt would also have to decline further. “We believe that Pakistan’s government debt will fall below 60 percent of GDP,” he said. On the external side, Phua identified a decline in narrow external debt to below 100 percent of current account receipts as another indicator that could support an improved sovereign credit profile. “Narrow external debt falling below 100 percent of current account receipts,” he said.

Despite the recent improvement, Phua said Pakistan remained some distance from attaining investment-grade status. “Investment grade is still multiple notches away,” he said.

He noted that investment-grade economies in the region generally demonstrate stronger institutional capacity alongside consistently higher economic growth.

“We’re talking about growth levels of 4-5 percent and above on an annual basis, on a long-term structural basis,” Phua said. Pakistan’s institutional capacity had improved, he said, but the improvement was taking place from a relatively weak starting point. “If you look at Pakistan’s institutional capacity, it has improved but is coming from a fairly low base,” he added.

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