Business Recorder
Fitch Ratings has affirmed Pakistan’s long-term Foreign-Currency Issuer Default Rating (IDR) at ‘B-’ with a stable outlook, saying Pakistan’s role as a ceasefire broker may provide tangible benefits and partly offset external pressures. Pakistan’s rating affirmation reflects progress on fiscal consolidation and macro stability measures, broadly in line with its IMF programme and supporting its funding capacity, the credit rating agency said in a statement on Monday. “Foreign exchange (FX) buffers rebuilt over the past year provide a cushion against the economic impact of the war in the Middle East, while Pakistan’s role as a ceasefire broker may provide tangible benefits and partly offset external pressures.” The country’s high exposure to the global energy price shock nonetheless remains a key risk, particularly if it leads to a sharp drop in FX reserves, said the release. Fitch Ratings noted that Pakistan’s programme with the International Monetary Fund (IMF) remains key. The authorities reached a staff-level agreement with the IMF on the third review of Pakistan’s Extended Credit Facility (ECF) and second review of the Resilience and Sustainability Facility in March 2026, unlocking a combined $1.2 billion if the agreement is approved by the IMF board. “The programme will continue to provide a key policy anchor, particularly for the fiscal framework, and will help mobilise additional multilateral and bilateral support,” Fitch Ratings said. It noted that the South Asian nation remains vulnerable to energy shocks. “Pakistan sources up to 90% of its oil from the Gulf and has limited storage capacity, creating high exposure to the Middle East conflict and constricted energy supply via the Strait of Hormuz,” said Fitch Ratings. It said that the government fuel subsidies since early March have been funded by reallocating expenditure from other areas of the budget, while costs have been reduced by large pump-price hikes and the switch to a more targeted support scheme from April. “We expect the overall impact on the fiscal deficit to be contained, as the government is likely to cut other spending,” said Fitch Ratings. The rating agency said that higher world energy prices will raise inflation in Pakistan in the coming months, especially with the switch to more targeted subsidy support and base effects. “We expect inflation to average 7.9% in FY26 (ending 30 June 2026), above the FY25 level but well below the 23.4% in FY24,” it said. The State Bank of Pakistan (SBP) cut the policy rate to 10.5% by the end of 2025, from 22.0% at the end of May 2024, and market interest rates fell in tandem. However, the term interbank rate had risen to about 100bp above the policy rate by early April, on inflation concerns tied to the tight energy supply. “The shock will detract from GDP growth, but we still expect growth of 3.1% in FY26, up slightly from 3.0% in FY25, due to improved confidence from lower borrowing costs,” said Fitch. READ MORE: Fitch Ratings affirms Pakistan’s long-term debt ratings at B- The rating agency assumed that Pakistan’s external debt amortisations will rise to $12.8 billion (2.9% of GDP) in FY26, from almost $8 billion in FY25. A $3.5 billion deposit was repaid to the UAE in April. “Our amortisation projections exclude another $9.2 billion in bilateral deposits and loans we expect to be rolled over. “We expect debt to be financed mainly by IMF and other multilateral and bilateral inflows, followed by commercial financing. Pakistan plans to issue a panda bond this fiscal year.” “We expect the primary surplus to narrow to 2.1% of GDP in FY26, 0.3pp below the official target,” it added. This will follow a rise in non-interest current expenditures and limits to sustained gains in tax revenue/GDP, due to capacity constraints and difficulties executing federal tax reforms at the provincial level. “We expect the primary surplus to shrink further in FY27 as extraordinarily high SBP dividends are unlikely to continue in our view, while lower interest payments as a share of GDP will help keep fiscal deficits stable at about 5.3% of GDP.” Fitch Ratings expects the current account to return to a small deficit of 1.1% in FY26 from a rare surplus of 0.5% in FY25. Moreover, FX reserves are expected to decline, albeit modestly. “We expect the current account deficit, and repayment of a $1.3 billion Eurobond and the UAE deposits in April to bring FX reserves down to $21.3 billion by the end of FY26. “This will cover 2.9 months of current external payments, from $22.6 billion at the end of FY25. Net FX reserves remain negative, reflecting FX reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP.” Fitch Ratings noted that tensions between Pakistan and Afghanistan have escalated since February 2026. Nevertheless, the potential impact on trade and the wider economy is likely to be limited. “Our baseline does not include further escalation, given Pakistan’s financing constraints, but the conflict presents a considerable risk to its commitment to fiscal consolidation.”
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