Pakistan’s economic stability improves, but IMF & structural reforms crucial: Fitch

Fitch Ratings said Pakistan has continued to make progress in restoring economic stability and rebuilding external buffers, projecting economic growth at 3% in the current fiscal year 2024-25 (FY25).

However, progress on difficult structural reforms will be key to upcoming International Monetary Fund (IMF) programme reviews and continued financing from other multilateral and bilateral lenders, the global rating agency said in a commentary titled ’ Pakistan’s Progress on Structural Reform Remains Key to Credit Profile’ on Thursday.

“Securing sufficient external financing remains a challenge, considering large maturities and lenders’ existing exposures,” it said.

The authorities budgeted about $6 billion of funding from multilaterals, including the IMF, in FY25, but about $4 billion will effectively refinance existing debt.

A recently-announced $20 billion 10-year framework with the World Bank Group appears broadly in line with this. The group’s current project portfolio is about $17 billion, and its net new yearly lending to Pakistan averaged around $1 billion over the past five years, Fitch Ratings added.

The global rating expects new bilateral capital flows to be increasingly “commercial, and conditional on reforms.”

Discussions on the partial sale of the government’s stake in a copper mine to a Saudi investor exemplify such commercial flows. Pakistan and Saudi Arabia also recently agreed on a deferred oil payment facility.

It said that economic activity, having absorbed tighter policy settings, is now benefitting from stability and falling interest rates. Growth in credit to the private sector turned positive in real terms in October 2024 for the first time since June 2022.

The State Bank of Pakistan’s decision to cut policy rates to 12% on January 27, 2025 underscored recent progress in taming consumer price inflation, which fell to just over 2% year-on-year in January 2025, down from an average of nearly 24% in the fiscal year ended June 2024 (FY24), it said.

Fitch was of the view that rapid disinflation reflects fading base effects from earlier subsidy reforms and exchange rate stability, underpinned by a tight monetary policy stance, which in turn has subdued domestic demand and external financing needs.

Strong remittance inflows, robust agricultural exports and tight policy settings have allowed Pakistan’s current account to move into a surplus of about $1.2 billion (over 0.5% of GDP) in the six months to December 2024, from a similarly sized deficit in FY24, it said.

Foreign exchange market reforms in 2023 also facilitated the shift. When upgrading Pakistan’s rating to ‘CCC+’ in July 2024, we expected a slight widening of the current account deficit in FY25, it recalled.

“Foreign reserves are set to outperform targets under Pakistan’s $7 billion IMF Extended Fund Facility (EFF) and Fitch’s earlier forecasts,” it said, adding gross official reserves reached over $18.3 billion by end-2024, about three months of current external payments, up from around $15.5 billion in June.

However, reserves remain low relative to funding needs. Over $22 billion of public external debt matures in the whole of FY25. This includes nearly $13 billion in bilateral deposits, which Fitch believes the bilateral partners will roll over, as per their promises to the IMF.

Saudi Arabia rolled over $3 billion in December, and the UAE $2 billion in January.