S&P Upgrades Pakistan to B, Projects Slower Growth and High Debt.

S&P Global Ratings raised Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-’ on Wednesday, citing improved political stability and enhanced institutional capacity that have facilitated key economic reforms under the International Monetary Fund (IMF) program.

Upgrade Drivers and Reform Progress

S&P listed political and institutional strengthening, alongside an improved fiscal trajectory, as the primary drivers behind the upgrade. Political stability has reinforced the government’s ability to deliver tough measures, accelerating fiscal consolidation and helping rebuild depleted external buffers.

The Ministry of Finance has maintained its consolidation path despite internal political resistance to certain reforms. S&P highlighted that the government’s revenue expansion efforts have contributed to a declining net general government debt-to-GDP ratio.

Additionally, the agency does not anticipate volatile international energy prices imposing a hefty fiscal burden on the country, noting Prime Minister Shehbaz Sharif’s policy of full energy price pass-through combined with targeted social safety subsidies as a key positive factor.

Outlook and Persistent Economic Challenges

Despite the rating upgrade, S&P projects a deterioration in several economic sustainability indicators for fiscal year 2026–27:

• Economic Growth: Forecast to slow slightly from 3.6% in fiscal 2026 to 3.5% in the current fiscal year.
• Investment & Savings: Total investment is projected to decline to 14.4% of GDP, with national savings falling to 13.5%.
• Exports & FDI: The exports-to-GDP ratio is expected to drop further to 9.6%, while net Foreign Direct Investment (FDI) is projected to slip to 0.4% of GDP.
• External Financing Needs: Gross external financing requirements are expected to rise to 104.9% of current account receipts.

High Debt Burden and Geopolitical Risks

Net general government debt relative to GDP is projected to remain above 60% throughout the forecast period, while extremely high interest expenses relative to fiscal revenue continue to heavily constrain the country’s debt burden assessment.

Pakistan also remains dependent on key bilateral partners. Deposits and currency swap facilities from China, Saudi Arabia, and Kuwait totaled $16.8 billion at the end of fiscal 2026, and S&P expects continued reliance on the rollover of these facilities.

Furthermore, narrow net external debt is forecast to reach 113% of current account receipts by the end of this fiscal year, ensuring that ongoing external debt maturities will keep pressure on State Bank of Pakistan reserves unless significant new funding is secured.

Geopolitical risks, including border tensions with India and Afghanistan, were also cited as potential catalysts for accidental clashes that could quickly strain credit metrics. S&P concluded that while entrenched reforms should deliver steady medium-term growth and fiscal consolidation, structural economic weaknesses remain deep.