ISLAMABAD:
Standard & Poor’s credit rating agency upgraded Pakistan by one notch to “B negative” on Thursday, an improvement from its previous standing, though still two positions below investment grade. This move comes due to the implementation of reforms and the abating risks of sovereign default.
S&P Global Ratings raised the long-term sovereign credit ratings from “CCC positive” to “B negative” after a gap of two and a half years, according to an announcement by the agency, one of the three largest credit rating firms.
The agency also assigned a stable outlook to Pakistan. The upgrade has improved Pakistan’s creditworthiness from “very high credit risk, vulnerable to non-payment” to “highly speculative.” Due to its junk credit rating, Pakistan was unable to float international bonds to raise more debt last fiscal year.
S&P stated, “The coalition government led by the Pakistan Muslim League-Nawaz (PML-N) has demonstrated its ability to implement necessary reforms under the IMF programme without significant social unrest.”
The agency noted that the willingness of policymakers to adhere to expenditure controls and continue enhancing the tax revenue base will be crucial in meeting the remaining targets set out in the Extended Fund Facility (EFF) arrangement.
The Ministry of Finance has played a key role in staying on track with the IMF programme, despite facing criticism for making tough decisions necessary to complete the first review of the programme and align the new budget with the Fund’s requirements.
S&P’s ratings upgrade reflects the agency’s view that Pakistan is less reliant on favourable macroeconomic and financial developments to meet its obligations. Pakistan has replenished its foreign reserves over the last 12 months, and near-term default risks have abated, according to S&P.
However, one vulnerable area that emerged is related to the exchange rate, which has led to intervention by the military establishment to prevent the reemergence of the grey market.
S&P highlighted that the Pakistani rupee’s depreciation against the US dollar in recent years contributed to stagnation in the country’s nominal GDP per capita. The agency noted that the rupee stabilised in the last fiscal year, and with rising real growth, it forecasts that GDP per capita will surpass $2,000 by fiscal year 2027.
The rating agency also emphasised that political stability and improvement in security conditions are critical for further upgrades. However, it expects political uncertainty to remain high due to a volatile political environment.
“Pakistani politics has been in flux since the ousting of former Prime Minister Imran Khan through a parliamentary no-confidence motion in April 2022,” S&P noted. “We believe that a stable political environment in Pakistan is a key precondition for improvements in the government’s creditworthiness.”
The security situation has improved since the early 2010s, but the potential for deterioration remains. Border tensions with India, highlighted by the recent outbreak of hostilities following the Pahalgam terrorist attack in May 2025, could escalate beyond the intentions of both sides, the agency warned.
S&P also pointed out risks related to debt-servicing costs, which remain high. The agency said Pakistan’s stable outlook reflects its expectation that external support from key multilateral and bilateral partners, along with improvements in the country’s fiscal position, will persist over the next 12 months to meet considerable debt obligations.
The outlook also reflects expectations that continued economic recovery and government efforts to enhance revenue will stabilise fiscal and debt metrics.
Pakistan’s current account posted a surplus in fiscal 2025, the first surplus in 14 years. The modest annual surplus of 0.5% of GDP was driven by record-high remittances, which totalled $39 billion, or 9.5% of GDP. These developments have strengthened Pakistan’s external metrics and alleviated near-term external stress.
The IMF programme-related reforms have significantly increased the government’s tax revenues by 3% of GDP in the last 12 months.
Alongside expenditure controls, S&P forecasts that the general government deficit will decrease to 5.1% of GDP in fiscal 2026, although this is higher than the government’s budget target.
The agency has projected inflation to stay around 6.5% over the next two to three years. As a result, monetary conditions will ease further, and with lower domestic interest rates, government interest payments will decrease to an average of 41% of revenue over the next three years, from a peak of over 60% in fiscal 2024.
“Nevertheless, Pakistan’s interest-servicing-to-revenue ratio remains one of the highest globally among rated sovereigns,” S&P stated. “The main pressure on debt sustainability is the extremely high interest expense relative to fiscal revenue.”
This remains a significant constraint on the agency’s assessment of Pakistan’s debt burden. S&P sees further deterioration in the debt-to-revenue ratio, projecting it to increase from 443% to 454% in this fiscal year.
Future warning:
“We may lower our ratings if Pakistan’s external or fiscal indicators deteriorate well beyond their current levels,” S&P stated.
Downward pressure would emerge if financial support from key bilateral and multilateral partners erodes quickly, or if usable foreign exchange reserves fall substantially, indicating difficulties in servicing external debt obligations.
Furthermore, should interest rates surge again and substantially add to the government’s already-heavy debt-servicing burden, the agency would view that as an indication of domestic financing stress, it added.
