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ISLAMABAD: Pakistan is making steady progress in restoring economic stability and rebuilding external buffers, according to Fitch Ratings. The agency emphasized that successful implementation of structural reforms will be crucial for upcoming IMF programme reviews and continued financing from multilateral and bilateral lenders.
The State Bank of Pakistan’s decision to cut policy rates to 12% on January 27 highlights recent success in controlling consumer price inflation, which dropped to just over 2% year-on-year in January 2025, down from an average of nearly 24% in FY24. This rapid disinflation reflects the impact of subsidy reforms, exchange rate stability, and a tight monetary policy, which reduced both domestic demand and external financing needs.
With tighter policies in place, economic activity is now benefitting from improved stability and lower interest rates. Real value-added growth is expected to reach 3.0% in FY25. Credit to the private sector turned positive in real terms in October 2024 for the first time since June 2022.
Strong remittance inflows, robust agricultural exports, and prudent policies helped Pakistan’s current account move into a surplus of $1.2 billion (0.5% of GDP) in the six months to December 2024, compared to a similar deficit in FY24. Foreign exchange reforms introduced in 2023 facilitated this improvement. When Fitch Ratings upgraded Pakistan’s rating to ‘CCC+’ in July 2024, it anticipated a slight widening of the current account deficit in FY25.
Foreign reserves are expected to outperform targets under the $7 billion IMF Extended Fund Facility (EFF). Gross official reserves reached over $18.3 billion by the end of 2024—about three months of external payments—up from $15.5 billion in June.
However, reserves remain low relative to funding needs, with over $22 billion in public external debt maturing in FY25. This includes nearly $13 billion in bilateral deposits, which bilateral partners are expected to roll over, as assured to the IMF. Saudi Arabia extended $3 billion in December, followed by the UAE with $2 billion in January.
New bilateral capital flows will likely be more commercial and linked to structural reforms. For example, the potential sale of a government stake in a copper mine to a Saudi investor highlights this trend. Pakistan and Saudi Arabia recently agreed on a deferred oil payment facility, offering additional relief.
Securing sufficient external financing remains challenging due to significant maturities and lenders’ existing exposures. Authorities have budgeted $6 billion in funding from multilaterals, including the IMF, in FY25, but $4 billion will refinance existing debt. The recently announced $20 billion 10-year framework with the World Bank Group aligns with this plan. The group’s current project portfolio is approximately $17 billion, with an average yearly net lending of $1 billion over the past five years.
Progress on fiscal reform continues, despite some setbacks. The primary fiscal surplus has exceeded IMF targets, although federal tax revenue fell short of IMF’s performance criteria in the first six months of FY25. All provinces recently approved higher agricultural income taxes, a key structural condition of the EFF. However, implementation delays meant the January 2025 deadline was missed.
In July 2024, Fitch Ratings noted that positive action could stem from a sustained recovery in reserves, reduced external financing risks, and fiscal consolidation aligned with IMF commitments. Conversely, any deterioration in external liquidity—such as delays in IMF reviews—could trigger a negative rating action.
