Rating Agency Sees Fiscal Progress, Highlights Vulnerability to Middle East Conflict
Fitch Ratings has affirmed Pakistan’s long-term foreign currency issuer default rating at ‘B-‘ with a stable outlook, the agency announced. The decision reflects the country’s progress on fiscal consolidation and macroeconomic stability measures, which are broadly aligned with its International Monetary Fund (IMF) programme.
The US-based agency noted that rebuilt foreign exchange reserves over the past year provide a cushion against the economic impact of the war in the Middle East. It also suggested Pakistan’s role as a ceasefire broker could offer tangible benefits and partly offset external pressures.
Persistent Risks and Key Drivers
Despite the affirmation, Fitch highlighted that Pakistan’s high exposure to global energy price shocks remains a key risk, particularly if it triggers a sharp decline in foreign exchange reserves. The agency pointed out that Pakistan sources up to 90% of its oil from the Gulf and has limited storage capacity, creating significant exposure to Middle East conflict and potential supply constraints via the Strait of Hormuz.
Key rating drivers include the staff-level agreement reached with the IMF in March, which unlocked $1.2 billion. Fitch stated this programme will continue to serve as a crucial policy anchor, especially for the fiscal framework, and help mobilise additional multilateral and bilateral support.
Fiscal and Economic Projections
Regarding fiscal measures, Fitch noted that fuel subsidies since early March have been funded by reallocating expenditure, with costs reduced by significant pump-price hikes and a switch to a more targeted support scheme from April. The agency expects the overall impact on the fiscal deficit to be contained as the government is likely to cut other spending.
On inflation, Fitch anticipates higher world energy prices will raise inflation in the coming months. It projects inflation to average 7.9% for the fiscal year ending June 2026 (FY26), above the FY25 level but well below the 23.4% recorded in FY24.
The State Bank of Pakistan had cut the policy rate to 10.5% by the end of 2025, from 22.0% in May 2024. However, the term interbank rate had risen to about 100 basis points above the policy rate by early April due to inflation concerns tied to tight energy supply.
Growth and External Debt Outlook
Fitch expects the energy shock to detract from GDP growth but still forecasts growth of 3.1% in FY26, slightly up from 3.0% in FY25, citing improved confidence from lower borrowing costs.
The agency anticipates external debt amortisations will rise to $12.8 billion (2.9% of GDP) in FY26, from almost $8 billion in FY25. This includes a $3.5 billion deposit repaid to the United Arab Emirates in April. These projections exclude another $9.2 billion in bilateral deposits and loans expected to be rolled over.
Fitch expects this debt to be financed mainly by IMF and other multilateral and bilateral inflows, followed by commercial financing. Pakistan plans to issue a panda bond this fiscal year as part of its financing strategy.
