Rating could be upgraded with recovery in foreign-currency reserves, easing of external financing risks, government debt falling, says agency.

Fitch Ratings said it upgraded Pakistan’s long-term foreign currency issuer default rating to CCC+ from CCC.

The rating agency said the upgrade reflects the country’s greater certainty over continued availability of external funding.

“Strong performance on the previous, more temporary IMF arrangement helped the country narrow fiscal deficits and rebuild foreign exchange (FX) reserves, and further improvements are likely,” it said in a statement.

However, Pakistan’s large funding needs leave it vulnerable if it fails to implement reforms, which could undermine the IMF programme’s performance and funding, it added.

Fitch forecasts Pakistan’s current account deficit to stay relatively contained at around $4 billion, or 1% of GDP, in the 2024 fiscal year, after $700 million in 2023 fiscal year, due to tight financing conditions and subdued domestic demand.

Government debt is estimated falling to 68% of GDP, from 75%, during that period, according to the agency.

“We expect inflation and interest costs to decline in tandem, with economic growth and primary surpluses driving government debt/GDP gradually lower,” said the statement.

Fitch warned that Pakistan’s rating could be downgraded if there is deterioration in external liquidity conditions that could result from delays in IMF programme reviews, or indications that the authorities are considering debt restructuring.

The country’s rating could be upgraded if there is sustained recovery in foreign-currency reserves, easing of external financing risks, and increased confidence in a downward trajectory for government debt.