S&P upgrades Pakistan's sovereign rating to 'B' on stronger reforms

S&P Global Ratings on Wednesday upgraded Pakistan's long-term sovereign credit rating to 'B' from 'B-', citing stronger institutional capacity, sustained implementation of International Monetary Fund-backed reforms, improved fiscal performance and a significant rebuilding of foreign exchange reserves.

The ratings agency assigned a stable outlook, saying it expects ongoing reforms to support steady economic growth, continued fiscal consolidation and Pakistan's ability to meet its external financing needs.

S&P also affirmed Pakistan's 'B' short-term sovereign credit rating and raised its transfer and convertibility assessment to 'B' from 'B-'.

"The stable outlook reflects our view of Pakistan's improved political and institutional settings," S&P said. "Entrenched economic reforms are expected to underpin sustained growth and fiscal discipline over the coming years."

IMF reforms underpin upgrade

S&P said the upgrade reflects improved institutional stability that has enabled Pakistan to implement key reforms under the IMF's USD 7 billion Extended Fund Facility (EFF), accelerating fiscal consolidation and rebuilding external buffers.

The agency said Pakistan has met most EFF targets since the program was approved in September 2024, allowing timely IMF disbursements and strengthening investor confidence.

Foreign exchange reserves, including the State Bank of Pakistan's gold holdings, rose to USD 25.3 billion at the end of June 2026 from USD 6.7 billion in December 2022. The agency said the reserves provide more than enough coverage for the government's USD 16.4 billion in external principal repayments due over the next 12 months.

S&P also highlighted Pakistan's return to international capital markets in April 2026 through a USD 750 million Eurobond and its inaugural CNY 1.75 billion panda bond, saying the issuances diversified the country's external funding sources alongside multilateral and bilateral financing.

Fiscal consolidation gains

S&P said Pakistan's efforts to broaden the tax base and strengthen revenue collection have accelerated fiscal consolidation.

The agency said tax revenue increased by 3.2 percentage points of GDP in the year ended June 2025, with strong momentum continuing in fiscal 2026.

It forecast the general government fiscal deficit at 4% of GDP in fiscal 2027, down from nearly 8% during the economic crisis in fiscal 2022 and fiscal 2023.

S&P expects Pakistan's net general government debt-to-GDP ratio to continue declining gradually, although it is likely to remain above 60% during the forecast period.

The agency also projected government interest payments would decline to an average of 38% of revenue over the next three years from more than 60% in fiscal 2024, reflecting lower domestic borrowing costs. However, it said Pakistan's debt-servicing burden remains among the highest of rated sovereigns.

Growth outlook remains positive

S&P said Pakistan's economy expanded 3.6% in fiscal 2026, marking a third consecutive year of growth after contracting in fiscal 2023.

The agency forecasts GDP growth of 3.5% in fiscal 2027, supported by continued IMF-backed reforms despite temporary inflationary pressures stemming from higher global energy prices linked to the Middle East conflict.

Consumer inflation averaged 7.2% in fiscal 2026, up from 4.5% a year earlier but well below 23.4% in fiscal 2024. S&P expects inflation to ease to around 6.5% by fiscal 2029.

External financing support

S&P said continued support from bilateral partners, including China, Saudi Arabia and Kuwait, along with IMF financing, has been instrumental in stabilizing Pakistan's external position.

The agency said bilateral central bank deposits and swap arrangements totaled USD 16.8 billion at the end of fiscal 2026, while renewed multilateral financing, including the World Bank's USD 20 billion Country Partnership Framework, has further strengthened the country's external financing prospects.

It expects Pakistan's current account deficit to average 0.9% of GDP between fiscal 2027 and fiscal 2029.

Risks remain

Despite the upgrade, S&P said Pakistan remains exposed to external financing pressures because of large debt maturities and continued reliance on bilateral funding rollovers.

The agency said it could downgrade Pakistan if fiscal or external indicators weaken because of reduced commitment to reforms, diminished support from bilateral or multilateral partners, or a sharp rise in domestic interest rates that increases debt-servicing costs.

Conversely, S&P said further upgrades are possible if Pakistan continues strengthening its fiscal and external position by reducing net government debt below 60% of GDP, narrowing fiscal deficits and further improving external debt metrics.