Global ratings agency Fitch on Wednesday affirmed Pakistan’s long-term foreign- and local-currency debt ratings at ‘B-’ with a stable outlook and assigned a ‘RR4’ recovery rating to the country’s senior unsecured instruments.

The rating action follows Fitch’s adoption of revised Sovereign Rating Criteria, effective from September 2025, under which recovery assumptions have been formally incorporated into sovereign debt ratings for the first time. The agency also removed the ratings from Under Criteria Observation (UCO).

Although ‘B-‘ indicates that Pakistan remains a high-risk borrower with significant credit vulnerabilities, the recent affirmation reflects a relative improvement. The rating was upgraded from ‘CCC+’ in April 2025 due to improved fiscal management, IMF-supported reforms, and stabilised external buffers.

This signals to lenders modest confidence and greater stability in Pakistan’s credit profile, potentially easing access to financing at somewhat lower (though still elevated) costs. It also encourages continued support from creditors, provided reforms continue.

According to Fitch, Pakistan’s senior unsecured long-term debt, including global bonds and sukuk issued under The Pakistan Global Sukuk Programme Company Limited, has been equalised with the sovereign’s Long-Term Foreign-Currency Issuer Default Rating (IDR).

The agency said the equalisation reflects expectations of average recovery prospects in a default scenario. This is given Pakistan’s elevated government debt levels, high interest payments as a share of revenue, and the absence of structural or legal features that would warrant notching the debt ratings above or below the sovereign IDR.

Topline Research, citing Fitch, noted that securities assigned an ‘RR4’ recovery rating are historically associated with recoveries in the range of 31% to 50% of current principal and related interest. This provides investors with additional guidance on downside risk in a stress or default scenario. The removal of UCO indicates that Fitch has completed its criteria review and does not reflect a change in Pakistan’s underlying credit fundamentals.

The upgrade on April 15, 2025, from ‘CCC+’ to ‘B-’ reflected improved macroeconomic stability, progress under the IMF-supported programme, tighter fiscal and monetary policies, and enhanced external financing assurances. Fitch reiterated that the latest rating action primarily reflects a methodological update rather than a reassessment of Pakistan’s credit profile.

Governance challenges remain a key constraint on Pakistan’s sovereign rating. Fitch assigned Pakistan an ESG Relevance Score of ‘5’ for political stability, rule of law, institutional strength, regulatory quality, and control of corruption, in line with its assessment framework for sovereigns.

These scores are driven by the high weighting of the World Bank Governance Indicators (WBGI) in Fitch’s Sovereign Rating Model. Pakistan’s WBGI ranking stands at the 22nd percentile, highlighting persistent weaknesses in policy predictability, institutional effectiveness, and governance outcomes.

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Data compiled by Topline Research shows that Pakistan’s sovereign rating trajectory has been volatile over the past decade, reflecting recurring balance-of-payments pressures and fiscal stress.

After maintaining a ‘B’ rating in 2015, Pakistan was downgraded multiple times, reaching ‘CCC-’ in February 2023 during the peak of external liquidity stress. Subsequent improvements in financing conditions and IMF support led to gradual stabilisation, culminating in the upgrade to ‘B-’ in April 2025, which has now been reaffirmed.

Fitch warned that Pakistan’s ratings remain sensitive to developments in public and external finances. On the downside, failure to place government debt and debt-servicing metrics on a clear downward path could lead to negative rating action. The agency also highlighted risks stemming from renewed deterioration in external liquidity, including potential delays in IMF programme reviews, weaker policy implementation, or insufficient external financing inflows.

On the upside, Fitch said a positive rating action could be triggered by material and sustained reductions in public debt and interest burdens. This is particularly the case if fiscal consolidation is implemented in line with IMF commitments and leads to structural improvements in tax revenue mobilisation.

Further easing of external financing risks, including improved access to international capital and a durable build-up of foreign exchange reserves beyond Fitch’s current projections, would also support an upgrade.