Fitch affirms Pakistan’s ‘B-’ rating with stable outlook

ISLAMABAD: Fitch Ratings has affirmed Pakistan’s long-term foreign currency issuer default rating at ‘B-’ and maintained a stable outlook, saying the decision reflects progress in fiscal consolidation and broader macroeconomic stabilisation measures that are largely aligned with the country’s International Monetary Fund (IMF) programme.

In its assessment issued on Monday, the US-based rating agency said Pakistan’s policy steps were supporting its funding capacity. Foreign exchange buffers rebuilt over the past year were providing some protection against the economic effects of the war in the Middle East. Fitch also said Pakistan’s role as a ceasefire broker could bring tangible benefits and partly ease external pressures.

At the same time, the agency identified Pakistan’s exposure to global energy price shocks as a major risk, particularly if such pressures result in a sharp decline in foreign exchange reserves.

IMF programme and fiscal outlook

Fitch said Pakistani authorities reached a staff-level agreement with the IMF on loan programmes in March, unlocking a combined $1.2 billion. According to the agency, the IMF programme will remain an important policy anchor, especially for the fiscal framework, and is expected to help attract further multilateral and bilateral support.

The rating agency said Pakistan remains vulnerable to energy-related disruptions. The country sources up to 90 per cent of its oil from the Gulf and has limited storage capacity, leaving it highly exposed to the Middle East conflict and any tightening of energy supply through the Strait of Hormuz.

Fitch said fuel subsidies introduced since early March had been financed through the reallocation of spending from other parts of the budget. The cost had been reduced through significant increases in pump prices and a shift to a more targeted support mechanism from April. ‘We expect the overall impact on the fiscal deficit to be contained, as the government is likely to cut other spending,’ the agency said.

On public finances, Fitch projected the primary surplus at 2.1pc of GDP in FY26, which it said would be 0.3 percentage points below the official target. It attributed this to higher non-interest current expenditures and limits to sustained improvements in tax revenue as a share of GDP, citing capacity constraints and difficulties in implementing federal tax reforms at the provincial level.

The primary surplus was likely to narrow again in FY27 because unusually high State Bank of Pakistan dividends were not expected to continue, although lower interest payments as a share of GDP would help keep fiscal deficits stable at about 5.3pc of GDP.

Fitch said a primary surplus and lower domestic borrowing costs should bring general government debt down to 68.9pc of GDP in FY26 from 70.7pc in FY25, though this would still remain above the ‘B’ median of 51.3pc of GDP in 2026. It also said Pakistan’s general government interest-to-revenue ratio should remain very high at 46.5pc.

Inflation, growth and monetary conditions

The agency said higher global energy prices would push inflation upward in the coming months, particularly because of the move to more targeted subsidy support and base effects. ‘We expect inflation to average 7.9pc in FY26 (ending June 30), above the FY25 level but well below the 23.4pc in FY24,’ it said.

Fitch noted that the State Bank of Pakistan had reduced the policy rate to 10.5pc by the end of 2025 from 22pc at the end of May 2024, with market interest rates falling alongside it. However, the term interbank rate had climbed to around 100 basis points above the policy rate by early April due to inflation concerns linked to tight energy supply.

On economic activity, the agency said the energy shock would weigh on growth, but it still expected gross domestic product growth of 3.1pc in FY26, slightly higher than 3pc in FY25, supported by improved confidence stemming from lower borrowing costs.

External financing and reserves

Fitch said external debt amortisations were expected to increase to $12.8bn, or 2.9pc of GDP, in FY26 from nearly $8bn in FY25. A $3.5 billion deposit was repaid to the United Arab Emirates in April, even though repayments have yet to take place.

The agency said its amortisation projections did not include another $9.2bn in bilateral deposits and loans that it expects 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,’ it said.

Fitch projected that the current account would move back into a small deficit of 1.1pc in FY26 after a rare surplus of 0.5pc in FY25. Pakistan’s foreign exchange policy still showed rigidities despite a push toward currency liberalisation in 2023, and noted that the rupee had appreciated by 30pc in real effective terms from its early 2023 trough, which likely contributed to large merchandise trade deficits. The agency added that hydrocarbons usually account for between one-quarter and one-third of goods imports.

It also said large and sustained net foreign exchange purchases by the SBP in the interbank market, along with a rally in gold prices, had lifted foreign reserves to just under $28.4bn in February 2026, while non-gold reserves rose by about $5.1bn year-on-year to $17.5bn.

‘We expect the current account deficit, and repayment of a $1.3bn Eurobond and the UAE deposits in April to bring foreign exchange 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,’ Fitch said.

The agency added that net foreign exchange reserves remained negative because of reserve deposits from domestic commercial banks, a Chinese central bank swap line and bilateral deposits held at the SBP.

Regional tensions

Fitch also noted that tensions between Pakistan and Afghanistan had risen since February 2026. However, the likely effect on trade and the broader economy would be limited. ‘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,’ the agency said.