Pakistan is making notable progress in restoring economic stability and strengthening its external reserves, according to a report by Fitch Ratings released on Thursday. The agency emphasized that structural reforms will be crucial for upcoming IMF programme reviews and securing long-term financial support from global lenders.
Key Economic Indicators Show Positive Trends
One of the key indicators of economic progress is the State Bank of Pakistan’s (SBP) decision to lower the policy rate to 12% on January 27, 2025. This move reflects a significant decline in inflation, with consumer price inflation dropping to just over 2% year-on-year in January, compared to an average of nearly 24% in FY24.
Fitch attributed this rapid disinflation to multiple factors, including the fading impact of earlier subsidy reforms, a stable exchange rate, and tight monetary policies that controlled domestic demand and external financing needs.
The agency projects Pakistan’s economic growth at 3.0% for FY25, highlighting that private sector credit growth turned positive in real terms for the first time since June 2022, signaling improving economic activity.
Stronger External Position and Improved Current Account Balance
Pakistan’s current account balance showed a surplus of $1.2 billion in the six months leading up to December 2024, a stark contrast to the deficit recorded in FY24. The strong inflows from remittances, rising agricultural exports, and tight fiscal policies played a significant role in this turnaround.
Foreign exchange reserves have exceeded expectations under Pakistan’s $7 billion IMF Extended Fund Facility (EFF), reaching $18.3 billion by the end of 2024, covering approximately three months of external payments. This marks an increase from $15.5 billion in June 2024.
However, Fitch pointed out that Pakistan still faces significant external financing requirements, with over $22 billion in public external debt maturing in FY25. Notably, about $13 billion in bilateral deposits are expected to be rolled over, with Saudi Arabia and the UAE already extending $3 billion and $2 billion, respectively.
Structural Reforms and Fiscal Consolidation
Fitch acknowledged progress on fiscal reforms, with the primary fiscal surplus outperforming IMF targets. However, federal tax revenue growth in the first half of FY25 fell short of the IMF’s indicative performance criterion.
Additionally, while all provinces have enacted higher agricultural income taxes—a key condition under the IMF programme—the implementation deadline of January 2025 was missed due to delays.
Fitch also noted that new bilateral funding flows are expected to be commercially driven and tied to reforms. The partial sale of a government stake in a copper mine to a Saudi investor and a recently agreed deferred oil payment facility with Saudi Arabia were cited as examples of such reform-linked investments.
Challenges and Outlook
Despite recent economic gains, Pakistan still faces challenges in securing external financing. The government has budgeted $6 billion in funding from multilateral lenders, including the IMF, in FY25, but $4 billion of this is set to refinance existing debt.
A $20 billion, 10-year financing framework with the World Bank Group has been announced, aligning with expectations based on Pakistan’s existing $17 billion project portfolio and annual net new lending of $1 billion.
Fitch stated that sustained reserve recovery, reduced external financing risks, and fiscal discipline in line with IMF commitments could lead to a positive rating adjustment in the future. However, delays in IMF reviews or external liquidity pressures could result in negative action.
Conclusion
Pakistan’s economic outlook is showing encouraging signs of stability, driven by improved foreign reserves, fiscal discipline, and monetary adjustments. However, continued reforms, strategic policy execution, and securing external financing will be critical to sustaining this progress and ensuring long-term financial stability.
