Pakistan has received a significant boost to its international credit profile after S&P Global Ratings upgraded the country’s long-term sovereign credit rating to B from B-. The rating agency cited improved political stability, stronger institutions, and continued implementation of economic reforms as the main reasons behind the upgrade.
The improved rating reflects growing confidence in Pakistan’s fiscal management and reform agenda, although S&P also highlighted several economic and external risks that continue to weigh on the country’s outlook.
Political Stability and Reforms Drive Rating Upgrade
According to S&P Global Ratings, Pakistan’s relatively stable political environment over the past two years has strengthened institutional capacity, enabling the government to implement key reforms under the International Monetary Fund (IMF) programme.
The agency said these reforms have accelerated fiscal consolidation, improved policy implementation, and helped rebuild the country’s external financial buffers.
S&P identified political stability, institutional strengthening, and fiscal discipline as the three primary factors supporting the sovereign rating upgrade.
Fiscal Consolidation Improves Economic Outlook
The rating agency noted that Pakistan has remained committed to fiscal consolidation despite facing resistance to several difficult policy measures.
Efforts to broaden the tax base and strengthen public finances have contributed to a gradual improvement in the government’s fiscal position and a decline in the net government debt-to-GDP ratio.
S&P also referred to tax measures such as the Agriculture Income Tax and efforts to expand the retail tax base as contributors to higher tax revenues. However, it is worth noting that both initiatives were not fully implemented during 2025.
The agency added that the government’s policy of allowing fuel price adjustments while providing targeted support to vulnerable households should help limit fiscal pressures arising from volatile global energy prices.
Economy Expected to Maintain Moderate Growth
S&P estimates Pakistan’s economy expanded by 3.6 percent during fiscal year 2026, marking the third consecutive year of economic growth.
For the current fiscal year, the agency forecasts GDP growth of 3.5 percent, supported by continued macroeconomic stability and structural reforms.
However, several economic indicators are expected to remain under pressure. Investment is projected at 14.4 percent of GDP, while national savings are forecast to reach 13.5 percent of GDP. The exports-to-GDP ratio is expected to decline to 9.6 percent, and net foreign direct investment is projected at only 0.4 percent of GDP.
External Financing Needs Remain High
Despite the improved rating, S&P cautioned that Pakistan continues to face significant external financing challenges.
The agency projects gross external financing requirements to rise to 104.9 percent of current account receipts, while narrow net external debt could reach 113 percent of current account receipts during the current fiscal year.
Pakistan is also expected to continue relying on the rollover of financial support from key bilateral partners, including China, Saudi Arabia, and Kuwait.
According to S&P, total bilateral support through central bank deposits and currency swap arrangements reached approximately $16.8 billion by the end of fiscal year 2026.
Debt Sustainability and Regional Risks Persist
S&P expects Pakistan’s net government debt-to-GDP ratio to continue declining gradually but remain above 60 percent over the medium term.
The agency also warned that high interest payments relative to government revenues remain a major challenge for long-term debt sustainability.
In addition, S&P highlighted geopolitical risks, noting that border tensions with India and Afghanistan could increase the risk of regional instability and economic uncertainty.
Despite these concerns, the agency believes continued implementation of structural reforms and prudent fiscal management could support steady economic growth and stronger public finances in the years ahead.