Pakistan’s Economic Stability Grows, But External Financing Risks Persist: Fitch

Karachi (February 8, 2025): While Pakistan has made significant progress in stabilizing its economy and rebuilding external reserves, it still faces major external financing challenges, Fitch Ratings cautioned in a recent report.

The global ratings agency acknowledged improvements in key economic indicators, with inflation slowing and foreign exchange reserves rising. The State Bank of Pakistan’s (SBP) decision to cut the policy rate to 12% on January 27 reflects a decline in inflation, which dropped to just over 2% in January 2025 from an average of nearly 24% in FY24. Stability in exchange rates and monetary tightening helped tame inflation and reduce external financing needs.

Economic growth is gradually picking up, with real value-added growth projected at 3.0% for FY25. Private sector credit also showed positive growth in real terms for the first time since June 2022. The country posted a $1.2 billion current account surplus in the second half of 2024, aided by strong remittances, agricultural exports, and tight fiscal measures.

Pakistan’s foreign exchange reserves reached $18.3 billion by the end of 2024, surpassing IMF targets. However, the country faces over $22 billion in external debt repayments in FY25, including nearly $13 billion in bilateral deposits. Fitch expects key allies, such as Saudi Arabia and the UAE, to roll over their financial commitments, as seen in recent extensions of $3 billion and $2 billion, respectively.

While Pakistan’s fiscal reforms have progressed, revenue growth in the first half of FY25 fell short of IMF targets. The government also missed the January 2025 deadline for implementing agricultural income tax reforms, a key IMF condition.

Fitch previously upgraded Pakistan’s rating to ‘CCC+’ in July 2024, signaling cautious optimism. It noted that continued reserve accumulation, reduced external financing risks, and adherence to IMF commitments could lead to further positive ratings. However, delays in securing external financing or IMF reviews could pose risks to economic stability.

Source: Agencies