By Staff Reporter
KARACHI: Fitch Ratings affirmed Pakistan’s long-term foreign-currency issuer default rating at B- with a stable outlook, pointing to progress on fiscal consolidation and macroeconomic stability that has tracked the International Monetary Fund program and bolstered the country’s funding capacity.
The rating company said rebuilt foreign-exchange buffers over the past year provide a cushion against the economic fallout from the war in the Middle East. At the same time, Pakistan’s role as a ceasefire broker may deliver tangible benefits that partly offset external pressures, Fitch said in a statement on Monday.
Pakistan has led a diplomatic push to mediate the crisis, though US-Iran talks held in Islamabad last week failed to produce a deal. Oil prices climbed back above $100 a barrel on Monday as the US Navy blocked ships to and from Iran via the Strait of Hormuz. Brent crude futures traded at $102.23 a barrel and West Texas Intermediate at $103.88.Pakistan’s high exposure to global energy price shocks remains a key rating risk, particularly if it triggers a sharp drop in foreign-exchange reserves, Fitch warned.
The country sources up to 90% of its oil from the Gulf and maintains limited storage capacity, leaving it vulnerable to conflict-related disruptions and any constriction of energy supplies through the Strait of Hormuz. It imports oil mainly from Saudi Arabia and the United Arab Emirates. In response, the government has funded fuel subsidies since early March by reallocating spending from other parts of the budget. Costs have been curbed through large pump-price increases and a switch to a more targeted support scheme starting in April. Fitch expects the overall impact on the fiscal deficit to be contained because the government is likely to cut spending elsewhere.
Higher world energy prices will push inflation higher in the coming months, amplified by the subsidy shift and base effects. The agency forecasts inflation averaging 7.9% in fiscal 2026, which ends June 30, 2026—above the fiscal 2025 level but well below the 23.4% recorded in fiscal 2024.The State Bank of Pakistan has cut its policy rate to 10.5% by the end of 2025 from 22% at end-May 2024, with market rates declining in tandem. By early April, however, the term interbank rate had risen to about 100 basis points above the policy rate on inflation concerns tied to tight energy supplies.
The energy shock will weigh on growth, but Fitch still projects gross domestic product expansion of 3.1% in fiscal 2026, a slight pickup from 3% in fiscal 2025, supported by improved confidence from lower borrowing costs. The IMF program remains the central policy anchor. Pakistani authorities reached a staff-level agreement with the fund in March on the third review of the Extended Credit Facility and the second review of the Resilience and Sustainability Facility, unlocking a combined $1.2 billion once approved by the IMF board. “The programme will continue to provide a key policy anchor, particularly for the fiscal framework, and will help mobilise additional multilateral and bilateral support,” Fitch said.
External debt amortizations are projected to climb to $12.8 billion, or 2.9% of GDP, in fiscal 2026 from nearly $8 billion in fiscal 2025. A $3.5 billion deposit was repaid to the UAE in April. Fitch’s projections exclude another $9.2 billion in bilateral deposits and loans that it expects will be rolled over. Debt financing is expected to come mainly from IMF, other multilateral and bilateral inflows, followed by commercial borrowing; Pakistan plans to issue a panda bond this fiscal year.
On the fiscal side, the primary surplus is seen narrowing to 2.1% of GDP in fiscal 2026, 0.3 percentage point below the official target, reflecting higher non-interest current expenditures and limits on sustained tax-revenue gains because of capacity constraints and difficulties executing federal tax reforms at the provincial level. The primary surplus is expected to shrink further in fiscal 2027 as extraordinarily high State Bank of Pakistan dividends are unlikely to continue, though lower interest payments as a share of GDP should keep the overall fiscal deficit stable at about 5.3% of GDP.
General government debt is forecast to decline to 68.9% of GDP in fiscal 2026 from 70.7% in fiscal 2025—still well above the B-category median of 51.3%—with the ratio expected to ease only gradually over the medium term. The interest-to-revenue ratio is projected to remain very high at 46.5%.The current account is expected to shift back to a small deficit of 1.1% of GDP in fiscal 2026 from a rare surplus of 0.5% in fiscal 2025.
Foreign-exchange reserves are projected to decline modestly to $21.3 billion by the end of fiscal 2026, covering 2.9 months of current external payments, from $22.6 billion at the end of fiscal 2025. The drop reflects the current-account deficit and repayments including a $1.3 billion Eurobond and the UAE deposits. Net foreign-exchange reserves remain negative, reflecting reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP.
Pakistan’s foreign-exchange policy continues to show rigidities despite the 2023 push toward liberalization. The rupee has appreciated 30% in real effective terms from its early 2023 trough, likely contributing to large merchandise trade deficits; hydrocarbons typically account for between a quarter and a third of goods imports. Large net foreign-exchange purchases by the central bank on the interbank market and a gold-price rally lifted gross reserves to just under $28.4 billion in February 2026, with non-gold reserves rising $5.1 billion year-on-year to $17.5 billion.
Tensions between Pakistan and Afghanistan have escalated since February. Fitch said the potential impact on trade and the wider economy is likely to be limited. Its baseline does not assume further escalation, given Pakistan’s financing constraints, but the conflict presents a considerable risk to the government’s commitment to fiscal consolidation.
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