A quest for credit-rating upgrade

EDITORIAL: The government is making a strong push to improve the country’s credit rating from international agencies. Recently, in a meeting with Moody’s, the finance minister urged the agency to upgrade Pakistan’s rating. While the rating and outlook have already improved slightly, they still remain below the levels seen in 2021.

Following the 2022 crisis, Pakistan’s ratings were downgraded in successive reviews, and nearly all foreign debt-related inflows dried up. With macroeconomic conditions improving in 2024, the rating was upgraded to Caa2 with a positive outlook in August 2024. However, it still remains a couple of notches below its pre-2022 crisis level.

Since then, Pakistan has been effectively shut out of the international debt market, and commercial borrowing from global banks had also stalled. That changed last month when the government secured $1 billion in syndicated financing from the UAE-based banks. This inflow helped the SBP’s foreign exchange reserves rise to $14.5 billion by the end of June. This was a welcome relief for a country in dire need of market-based international inflows.

Now the government is preparing to return to international capital markets after years of absence. It is planning to issue its inaugural Panda bond in China during the current fiscal year and is also considering the issuance of a Eurobond. But accessing these markets is difficult without a better credit rating.

This is why the finance minister is pushing hard for an upgrade — to unlock the inflows needed to sustain external stability. It is a classic chicken-and-egg situation: rating agencies want to see stronger reserves before upgrading the rating, but stronger reserves depend on market access which, in turn, depends on better ratings.

The $1 billion deal with the UAE-based banks, secured at around a 7 percent interest rate, was a stroke of luck. The government has also stayed on track with the IMF’s programme, meeting all binary targets. For the first time since 2004, Pakistan has achieved primary fiscal surpluses for two consecutive years, and the current fiscal year is targeting the highest primary surplus as a share of GDP.

Inflation has sharply declined due to weak domestic demand, falling global commodity prices, and a stable currency. This has allowed interest rates to be halved (further cuts cannot be ruled out). The current account was in surplus in FY24, and the SBP purchased over $9 billion from the interbank market in 2024. The buying has continued into 2025, allowing reserves to build up without increasing external debt. Additionally, the SBP has significantly reduced its forward and swap liabilities.

Now is the time to act while favourable conditions exist. However, risks remain. FBR revenues fell short of targets in FY25, and the targets for this fiscal year are even more ambitious. Businesses have raised concerns over the enhanced powers granted to the FBR and other new policy measures. Formal sector firms, already heavily taxed, are feeling the pressure. The situation is hurting the new investment prospects.

Existing industries are operating below capacity, and the crushing tax burden is worsening the situation. It is, therefore, critical to secure an improved rating and outlook to gain access to international markets on better terms. That, in turn, will boost reserves further, supporting another round of rating improvements. Combined with a favourable geopolitical climate, this could eventually lead to a recovery in both foreign direct investment and local private sector confidence.

Copyright Business Recorder, 2025