ISLAMABAD (The Thursday Times) — Fitch Ratings affirmed Pakistan’s long-term foreign-currency issuer default rating at ‘B-’ with a stable outlook, offering a guarded endorsement of the country’s recent economic stabilisation while warning that heavy debt obligations, energy dependence and external financing pressures continue to leave it vulnerable.
The decision by Fitch, one of the world’s three leading credit rating agencies, comes as Pakistan tries to consolidate a fragile recovery after a prolonged period of inflation, foreign exchange shortages and repeated balance-of-payments stress. In its assessment, the agency said the affirmation reflected progress on fiscal consolidation and broader macroeconomic stability, measures that it said were broadly in line with the country’s programme with the International Monetary Fund.
That progress, Fitch said, had supported Pakistan’s funding capacity and helped rebuild foreign exchange buffers over the past year. The agency added that those reserves now offer some cushion against the economic effects of the conflict in the Middle East, even as it warned that Pakistan remains highly exposed to any sustained energy shock.
Fitch also made a notable reference to Pakistan’s diplomatic role, saying the country’s position as a ceasefire broker could produce tangible benefits and partly offset external pressures. But the agency’s broader message was one of caution: stability has improved, yet the foundations remain narrow.
At the centre of Fitch’s analysis is Pakistan’s continued reliance on the IMF as an anchor of economic policy. The agency noted that Pakistani authorities reached a staff-level agreement with the Fund in March on loan programmes that would unlock a combined $1.2 billion. That agreement, Fitch said, should help preserve discipline in fiscal policymaking while also encouraging further multilateral and bilateral support.
Even so, the agency pointed to several enduring vulnerabilities. Pakistan imports up to 90 per cent of its oil from Gulf countries and has limited storage capacity, leaving it exposed to disruptions in regional supply routes. Any tightening of energy flows through the Strait of Hormuz, Fitch said, would pose a direct threat to reserves, inflation and growth.
The government’s response to higher fuel costs has involved a mix of subsidy adjustments, price increases and spending reallocations. Fitch said it expected the overall effect on the fiscal deficit to remain contained because the government would probably cut expenditure elsewhere, but that assessment was tempered by concerns about how much further adjustment can be sustained.
Inflation, which had eased sharply from the crisis levels seen in fiscal year 2024, is expected by Fitch to average 7.9 per cent in fiscal year 2026. That would still mark a significant improvement on the 23.4 per cent recorded in fiscal year 2024, but would also represent an increase from fiscal year 2025 as higher global energy prices begin feeding back into domestic costs.
The agency said the shock from tighter energy supply would weigh on economic activity, though it still expects gross domestic product growth of 3.1 per cent in fiscal year 2026, slightly above the 3 per cent estimated for fiscal year 2025. Lower borrowing costs have helped underpin that forecast. The State Bank of Pakistan had cut its policy rate to 10.5 per cent by the end of 2025, down from 22 per cent at the end of May 2024, though market rates have recently edged higher amid renewed inflation concerns.
Debt servicing remains one of the clearest pressures on the outlook. Fitch said external debt amortisations were likely to rise to $12.8 billion in fiscal year 2026, up from nearly $8 billion the year before. It said Pakistan would depend largely on IMF disbursements, other multilateral and bilateral inflows, and some commercial financing to meet those obligations. The agency also noted plans for a panda bond issuance this fiscal year.
On the fiscal side, Fitch expects Pakistan’s primary surplus to narrow to 2.1 per cent of gross domestic product in fiscal year 2026, slightly below the government’s target. It cited rising non-interest current spending, capacity limits in tax collection and the difficulty of carrying federal tax reforms through at provincial level. The primary surplus, it said, is likely to shrink further in fiscal year 2027 as unusually high central bank dividends fade.
Public debt is still expected to decline modestly, with general government debt projected at 68.9 per cent of GDP in fiscal year 2026, down from 70.7 per cent in fiscal year 2025. Even so, that would remain well above the median for similarly rated sovereigns. Fitch said Pakistan’s interest-to-revenue ratio would stay exceptionally high at 46.5 per cent, underlining how much of the state’s finances are still absorbed by the cost of past borrowing.
Pakistan’s external accounts, after recording a rare current account surplus in fiscal year 2025, are also expected to deteriorate again. Fitch forecasts a current account deficit of 1.1 per cent of GDP in fiscal year 2026. It said the country’s foreign exchange policy still showed signs of rigidity despite efforts towards currency liberalisation, and argued that the rupee’s sharp real effective appreciation since early 2023 had probably contributed to wide merchandise trade deficits.
The agency estimated that foreign exchange reserves, which rose with large central bank purchases on the interbank market and gains linked to higher gold prices, would fall to $21.3 billion by the end of fiscal year 2026. That would provide cover for just 2.9 months of current external payments. Fitch added that net reserves remain negative once deposits from domestic commercial banks, bilateral placements and swap arrangements are taken into account.
It also flagged tensions between Pakistan and Afghanistan, which it said had escalated since February. While Fitch judged the immediate economic effect likely to remain limited, it warned that any wider conflict could test Pakistan’s commitment to fiscal consolidation at a time when its room for manoeuvre remains constrained.
