Following three years in junk status, Pakistan’s sovereign credit rating on S&P Global has been improved from CCC+ to B-, and the outlook is stable. But it’s more than just a better score: It suggests that the country is increasingly confident it will be able to get on top of its economy, manage its finances, and avoid a default. For a country so long hobbled by fiscal mismanagement, political upheaval and balance of payments crises, and this upgrade is an unusual and meaningful moment.
Pakistan’s credit rating upgrade from CCC+ to B- reflects growing confidence in its economic management and reform efforts.
Credit ratings are all about prestige. They affect the price at which a country can borrow, the conditions it can set with lenders, and how investors view its future. There is a complex series of numbers that underlie S&P’s decision that assert that Pakistan’s macroeconomic fundamentals are slowly, but meaningfully, on the mend. Foreign reserves, however, have increased from a dangerous $6.7 billion to $20.5 billion. This strong resurgence is primarily as a result of receipts from the IMF and its bilateral partners, such as China, Saudi Arabia and the UAE. In addition to that, Pakistan has reported a current account surplus for the first time in 14 years, which has” relieved” the pressure on external financing requirements.
And inflation that had soared to 29 per cent is now down to a mere 4.5 per cent, a stunning transformation. From the elevated heights to which the interest rate was aggressively hoisted to tame inflation, at 15 per cent, it has come down to 11 per cent, thereby making borrowing cheaper for businesses and families. On the fiscal deficit side, the result is that the government has been able to bring the fiscal deficit from 7.9 per cent of the GDP to 5.6 per cent. Even more impressively, the tax-to-GDP ratio has increased by 3 per cent, which is to say, a rare success of expanding the revenue base, where Pakistan has perennially lagged.
Pakistan’s policymakers were also able to secure rollovers worth $16.8 billion in external deposits and currency swaps. The rollovers have been key to balancing the external account and to averting a default. And a $20 billion deal with the World Bank has brought long-term development into the spotlight, signalling to the rest of the world that Pakistan’s friends abroad still see possibilities provided the country can avoid going off the rails.
These figures and reforms have together helped to ease some of the default risk that had long shadowed the economy. Pakistan’s growth prospects are becoming more favourable, S&P said, aided by continuing reforms and greater external financing buffers. The outlook is stable but relies on a continued track record of reforms pursued and a certain level of political stability, two things that have historically proved to be difficult.
Foreign reserves increased from $6.7 billion to $20.5 billion, aided by IMF and bilateral support from China, Saudi Arabia, and UAE.
International support has played a critical role. The IMF programmes have imposed fiscal discipline, urged the rationalisation of energy prices, and advocated market or equilibrium exchange rates. Although politically unpopular and socially painful, these reforms have paved the way for stability. Bilateral assistance, especially from Gulf-based allies and China, has also helped stave off a liquidity squeeze. Pakistan has been supported by short-term capital injections, keeping its reserves afloat. It is this blend of global confidence and local adaptation that is prodding S&P to see a brighter side.
But the report card comes with caveats. S&P is right to emphasise that political fragility is still a significant risk. Pakistan’s momentum for reform is precarious; political transitions, elite backlashes or populist reversals can shake it. These economic gains are recent, however, and they can be lost. Structural bottlenecks, including weak institutions and governance, a narrow revenue structure, and inefficiencies in the energy sector, continue to undermine the sustainability of the growth path. Any backpedalling on reforms or failure to confront deeper, systemic inefficiencies risks unravelling a great deal of the progress that has been made recently.
Moreover, external risks remain. Pakistan is also exposed to global commodity price movements, particularly those of oil and food. A rise in international prices would expand that deficit again. And in the same vein as in the past, regional instability or a fall in remittances could rapidly eat away at the cushion of the reserves. There is also global uncertainty around the financial climate. If Western central banks persist in tightening monetary policy, access to capital could become more expensive for Pakistan, potentially placing a cap on its international market access. Such potential hazards and obstacles make a case, once again, for persistent vigilance and reform in economic management in Pakistan.
For Pakistan, the fallout of the B-rating is direct and significant. It reduces the market interest rate on government debt, thereby improving the government’s ability to find affordable loans, and encourages investors who previously deemed the country too risky. It also enables corporates to tap into borrowing from outside at lower costs, which can encourage investment in industrial activities. This access to capital is enormously important for a country starved for growth and employment. In practical terms, it will allow Pakistan to borrow money at lower interest rates, to use on development and growth projects.
Inflation dropped dramatically from 29% to 4.5%, and the fiscal deficit was reduced from 7.9% to 5.6% of GDP.
This upgrade also sends a strong signal to multilateral institutions, foreign investors and credit markets that Pakistan is trying to put behind it the boom-and-bust cycle that has characterised its economic narrative for decades. It vindicates the government’s hard choices and offers a template for less volatile financial planning.
But a B- is still way into speculative territory. It isn’t an indication of economic strength or even economic health, per se, but of a relative improvement. Pakistan has not reached safe land or stability. What S&P is saying is we’ve made a dent, but we’ve got a ways to go. The hard work now lies in keeping the momentum for reform against political resistance and economic fatigue.
For the people of Pakistan, the effects of such changes are yet to work themselves out.’ Inflation has been slowing, but real incomes are still squeezed. The fiscal adjustment has been severe, usually accompanied by cuts in public spending. And even as the macroeconomic indicators improve, the impact on jobs, stability, and growth at a local level takes time.
Political instability and structural inefficiencies remain significant risks that could undermine recent economic gains.
Pakistan’s credit upgrade is a significant announcement. It’s a testament to hard-won macroeconomic gains, stronger relationships with creditors, and some baby-step reforms. But this isn’t a victory, it’s an opportunity. An opportunity to learn from repeated crises, to strengthen institutions and reorient the economy toward sustainability and inclusion. It’s a narrow and risky path forward, but for now, Pakistan has earned some breathing room and a potential opportunity to rewrite its economic future.
Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.
