Fitch Ratings optimistic about Pakistan’s economic recovery in FY25

Fitch Ratings has outlined that Pakistan’s ability to continue progressing with structural reforms will be a decisive factor in shaping its credit outlook in the coming years.

As the country aims to restore economic stability and bolster external financial reserves, the success of these reforms will be pivotal in maintaining access to multilateral and bilateral financing, particularly from the International Monetary Fund (IMF).

Pakistan's recent economic strides have been supported by a series of policy decisions, including the State Bank of Pakistan's cut in policy rates to 12% on January 27, 2025. This move reflects improvements in inflation management, with consumer price inflation dropping to just over 2% year-on-year in January 2025, from nearly 24% in FY24.

Fitch highlighted that this disinflation trend, along with exchange rate stability and a tight monetary policy stance, has reduced domestic demand and external financing needs, bringing relief to the country’s financial situation.

Positive growth amid structural adjustments

The outlook for Pakistan’s economy in FY25 appears optimistic, with Fitch forecasting 3.0% real GDP growth. The country’s efforts to absorb tighter policy settings have allowed it to benefit from lower interest rates, and private sector credit growth has turned positive in real terms for the first time since June 2022.

Pakistan’s current account has also seen improvement, with a surplus of approximately USD 1.2 billion in the six months to December 2024, compared to a deficit in the previous fiscal year. Strong remittances, robust agricultural exports, and foreign exchange reforms have contributed to this positive shift.

However, Fitch noted that while reserves reached $18.3 billion by the end of 2024—equivalent to about three months of current external payments—Pakistan still faces significant external financing needs. The country has over $22 billion in public external debt maturing in FY25, including $13 billion in bilateral deposits.

Fitch expects Pakistan’s bilateral partners, including Saudi Arabia and the UAE, to honor their commitments to rollover these funds, but external liquidity remains a key concern.

Challenges Ahead: Financing and reforms

The outlook for Pakistan’s credit profile hinges on its ability to secure sufficient external financing and continue its structural reform efforts. The government has budgeted for USD 6 billion in multilateral funding for FY25, but much of this will go towards refinancing existing debt.

Recent announcements, such as a $20 billion 10-year framework with the World Bank Group, represent positive steps but will require careful management.

Fitch emphasized that although fiscal reforms are moving forward, Pakistan faces challenges in meeting IMF targets, particularly in the areas of tax revenue growth and the timely implementation of agricultural income tax legislation.

Delays in structural reforms could complicate the country’s efforts to maintain a stable economic trajectory.

Outlook: Risks and opportunities

Looking ahead, Fitch believes that positive rating actions for Pakistan could be driven by a sustained recovery in foreign reserves, further easing of external financing risks, or the implementation of fiscal consolidation measures in line with IMF commitments.

However, any delays in IMF reviews or worsening external liquidity could result in negative credit actions.

In conclusion, while Pakistan has made significant strides in addressing its economic challenges, the path forward remains dependent on the continued implementation of structural reforms, the stabilisation of external financing, and the country’s ability to manage large public debt maturities in the coming fiscal year.

The ongoing reform agenda will be key to ensuring a stable outlook for the country’s credit profile.