A qualified upgrade

S&P Global’s decision to lift Pakistan’s long-term sovereign rating from B-minus to B, with a stable outlook, is welcome. It can improve investor sentiment, reduce the sovereign risk premium and, over time, lower the price at which the government and Pakistani companies borrow abroad. It also marks a notable retreat from the edge of default.

Yet it must be read precisely. A sovereign rating judges the state’s capacity and willingness to service debt. It is not a certificate of broad economic health. Even at B, Pakistan remains in speculative territory and vulnerable to adverse economic conditions. The upgrade therefore says that creditors face less risk than before, not that households and businesses have entered a period of prosperity.

Why has the upgrade come now? S&P points directly to stronger institutional stability, implementation of IMF-backed reforms, improved revenue collection, fiscal consolidation, recovering reserves and continued official financing. These are material gains. Pakistan is more stable than it was during the balance-of-payments panic that preceded the present programme.

But there is a danger of mistaking reinforced signals for independent confirmation. In Pakistan, an IMF programme often performs a function similar to that of a ratings agency. Successful reviews reassure bilateral creditors, unlock multilateral money and indicate that near-term financing needs can be met. If a credit-rating agency then upgrades Pakistan partly because IMF targets are being met and IMF-linked financing remains available, the result risks becoming an echo chamber: the programme validates the rating, while the rating validates the programme.

That does not make the upgrade meaningless. It does mean the government should resist presenting it as proof of an economic transformation. Stabilisation achieved through higher administered prices, import restraint, expensive credit and heavier taxation can improve sovereign solvency while leaving investment and productive capacity weak.

The more revealing measures now lie elsewhere: private fixed investment, export volume and sophistication, productivity, formal employment, real wages and poverty. Policymakers should also track whether tax collection rises through a broader base rather than repeated demands on existing taxpayers; whether reserves are built through exports and durable capital inflows rather than new debt; and whether power-sector losses, circular debt and state-owned enterprise liabilities actually decline.

Real reform changes incentives and institutions. It makes taxation fairer, energy markets functional, competition stronger and public spending more productive. IMF compliance may have created the breathing room behind this upgrade. The test is whether Pakistan uses that room to build an economy capable of standing without another programme.