Pakistan Eyes Next S&P, Moody’s Upgrades as Fiscal Position Improves

KARACHI, PAKISTAN — WEB DESK: Pakistan could position itself for further improvements in its sovereign credit ratings if it sustains fiscal discipline, reduces its debt burden, strengthens government revenues and builds more durable external buffers, according to an economic analysis outlining a possible roadmap for the country’s next ratings cycle.

The analysis argues that Pakistan should aim for an S&P rating of B+ within two years and a Moody’s rating of B1 within three to five years, although achieving either would depend on continued structural reforms rather than short-term improvements in headline economic indicators.

S&P raised Pakistan’s sovereign rating to B in July 2026, according to the analysis, while Moody’s rating stands at Caa1, unchanged since August 2025.

Even if Pakistan reached the proposed B+ and B1 targets, its sovereign debt would still remain below investment grade.

Fiscal deficit shows sharp improvement

Pakistan’s improving fiscal position is identified as one of the strongest arguments supporting a better sovereign credit profile.

The consolidated fiscal deficit fell from 7.9% of GDP in FY2022 and 7.8% in FY2023 to 6.8% in FY2024 and 5.4% in FY2025, according to figures cited in the analysis.

For FY2026, the provisional deficit is placed at just 2.6% of GDP.

The primary balance — which excludes interest payments — has also moved into surplus.

Pakistan recorded primary surpluses of 0.9% of GDP in FY2024, 2.4% in FY2025 and 2.9% in FY2026, while the FY2027 budget targets another 2% surplus.

Sustaining that performance beyond the current IMF-supported reform period would be critical because rating agencies generally place greater weight on durable fiscal improvements than temporary gains.

Revenue quality remains a challenge

Despite better headline numbers, the quality and sustainability of Pakistan’s fiscal adjustment remain important considerations.

Tax revenue stood at 11.2% of GDP in FY2026, according to the analysis.

The fiscal outcome also benefited from Rs2.43 trillion in State Bank profit and a large statistical adjustment.

That means future progress will increasingly need to come from structural improvements such as broadening the documented tax base, digitalising compliance, reducing leakages and improving expenditure efficiency.

A higher tax-to-GDP ratio could strengthen Pakistan’s ability to service debt while maintaining spending on infrastructure and social programmes.

Debt reduction central to next S&P upgrade

Public debt remains one of the biggest obstacles to a stronger sovereign rating.

The analysis cites S&P criteria suggesting that further improvement would require the annual increase in net general government debt to remain below 3% of GDP, while net government debt would need to decline below 60% of GDP.

Government revenues would also need to continue rising and financing costs would have to moderate.

External indicators matter as well.

Among the thresholds cited are narrow net external debt of less than 100% of current-account receipts and gross external financing requirements below 100% of current-account receipts plus usable reserves.

Together, these indicators demonstrate why Pakistan’s next rating improvement will depend on both fiscal consolidation and greater resilience in the external account.

Lower borrowing costs could bring major savings

The potential financial benefit of sustained economic stabilisation could be substantial.

Pakistan’s domestic debt reached approximately Rs59.5 trillion in June 2026, according to figures cited in the analysis.

A reduction of two to three percentage points in the effective cost of that debt, once the portfolio gradually reprices, could theoretically produce gross annual savings of approximately Rs1.2 trillion to Rs1.8 trillion.

Such savings would not result from a credit-rating upgrade alone.

Inflation, monetary policy, fiscal credibility, market liquidity and investor confidence would all influence borrowing costs.

Higher sovereign ratings could nevertheless reinforce those improvements by reducing perceived credit risk.

Better ratings could also lower borrowing costs on international Eurobonds and sukuk, potentially improving financing conditions for Pakistani companies seeking access to overseas capital.

Development financing needs new approach

Pakistan’s limited fiscal space also raises questions over how major infrastructure projects should be funded.

The federal Public Sector Development Programme was allocated around Rs1 trillion in FY2018, equivalent to roughly $9.5 billion at the exchange rate prevailing at the time.

The FY2027 allocation is again around Rs1 trillion, but its dollar value has fallen to roughly $3.6 billion, according to the analysis.

Greater use of competitive public-private partnerships is proposed for major infrastructure such as roads, dams, airports and universities.

Under such a model, the government could provide land, limited guarantees or viability-gap financing while institutional investors, banks and infrastructure funds provide more of the capital.

Provinces could assume greater fiscal responsibility

The analysis also proposes reconsidering Pakistan’s fiscal relationship between the federal government and provinces.

It argues that future National Finance Commission arrangements could place greater emphasis on revenue generation, education, health, poverty reduction, climate resilience, exports and investment performance rather than relying predominantly on population.

Greater provincial responsibility for devolved services could potentially free federal resources for sovereign debt, defence and other nationwide obligations.

Such changes, however, would require political negotiations and constitutional and institutional consensus.

Pakistan has achieved higher ratings before

Pakistan’s ratings history demonstrates that further upgrades are possible.

The country reached S&P B+ in November 2004 and Moody’s B1 in November 2006, according to the analysis.

A later improvement cycle saw Moody’s move Pakistan from Caa1 to B3 in June 2015, followed by an S&P upgrade to B in October 2016.

Pakistan has therefore returned to its previous S&P B level, but significant progress would still be needed to reach stronger historical ratings.

Reform durability will determine outlook

The central challenge is ensuring that recent stabilisation becomes structural rather than cyclical.

Digitised taxation, electronic invoicing, transparent government contracting, improved land records, beneficial-ownership disclosure and faster commercial dispute resolution are among the reforms proposed to strengthen economic institutions.

The analysis also argues that investment incentives and concessional financing should increasingly target export production and import substitution rather than consumption.

Pakistan possesses significant agricultural, mineral and industrial resources, but converting them into higher-value exports will require sustained investment, infrastructure and predictable policies.

Ultimately, the next sovereign upgrade will depend less on a single favourable fiscal year and more on whether Pakistan can demonstrate several years of lower debt accumulation, stronger revenues, manageable financing requirements and improving external resilience.

That would determine whether the country can move beyond stabilisation and establish a credit profile capable of supporting cheaper and more reliable long-term financing.