ISLAMABAD: Pakistan should set a clear sovereign credit rating target of S&P’s B+ within two years and Moody’s B1 within three to five years, according to an assessment of the country’s fiscal and economic outlook.

S&P Global Ratings upgraded Pakistan to B in July 2026, while Moody’s has maintained the country’s rating at Caa1 since August 2025. Both ratings remain below investment grade.

The assessment argues that Pakistan has made progress by avoiding default and restoring macroeconomic stability. However, sustained institutional reforms and fiscal discipline will be needed to secure further upgrades.

Fiscal Position Shows Improvement

Pakistan’s consolidated fiscal deficit has declined steadily, falling from 7.9% of GDP in FY22 and 7.8% in FY23 to 6.8% in FY24, 5.4% in FY25 and a provisional 2.6% in FY26.

The primary balance has also improved. It moved from a deficit to surpluses of 0.9% in FY24, 2.4% in FY25 and 2.9% in FY26.

The FY27 budget targets another 2% primary surplus. Maintaining these surpluses beyond the current IMF programme would provide stronger evidence of long-term fiscal discipline.

Tax Reform Remains Critical

Government expenditure has also declined. Consolidated current spending fell from Rs21.53 trillion in FY25 to Rs20.69 trillion in FY26.

Markup payments dropped from Rs8.89 trillion to Rs6.95 trillion during the same period.

However, the quality of fiscal adjustment remains important. Tax revenue stood at 11.2% of GDP in FY26, while State Bank profit of Rs2.43 trillion and a negative statistical discrepancy of Rs853 billion supported the headline fiscal result.

Future improvements will therefore need to come from broader documentation of taxpayers, digital compliance and more efficient public spending.

New Model Needed for Development Spending

Pakistan also needs to reconsider how it finances major infrastructure projects.

The federal Public Sector Development Programme allocation was Rs1.001 trillion in FY18. At that time, the amount was worth roughly $9.5 billion. The FY27 allocation is again around Rs1 trillion but is now worth only about $3.6 billion.

Provincial development spending has become increasingly important. Provinces spent Rs2.70 trillion on development projects in FY26 compared with net federal spending of Rs727 billion.

The assessment suggests that projects such as dams, roads, airports and universities should increasingly use competitive public-private partnerships.

Under such arrangements, the government could provide land, viability-gap funding and transparent tariffs, while banks, pension funds, insurers and infrastructure bonds finance construction.

NFC Formula Needs Reform

The National Finance Commission (NFC) formula could also be modernised.

The current formula gives 82% weight to population, 10.3% to poverty, 5% to revenue effort and 2.7% to inverse population density.

A revised formula could place greater emphasis on own-source revenue, school enrolment, healthcare outcomes, poverty reduction, climate resilience, exports, foreign investment and population stabilisation.

Provinces could also take greater responsibility for devolved education and health services, social protection and policing.

Pakistan Has Achieved Higher Ratings Before

Pakistan has previously achieved stronger sovereign ratings.

S&P raised Pakistan to B+ in November 2004, while Moody’s assigned a B1 rating in November 2006.

A second improvement cycle saw Moody’s raise Pakistan from Caa1 to B3 in June 2015. S&P subsequently upgraded the country to B in October 2016.

Pakistan has now regained its 2016 S&P rating, but Moody’s remains below its 2015 level and three notches below its 2006 peak.

Lower Borrowing Costs Could Bring Major Savings

A stronger sovereign rating could eventually reduce borrowing costs.

Pakistan’s domestic debt reached Rs59.5 trillion in June 2026. A two- to three-percentage-point decline in the effective cost of this debt could eventually generate estimated annual gross savings of around Rs1.2 trillion to Rs1.8 trillion.

The impact would emerge gradually as existing debt reprices. Inflation, monetary policy and fiscal credibility would also influence borrowing costs.

Cheaper sovereign Eurobonds and sukuk could additionally establish lower benchmarks for private-sector dollar borrowing.

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Investment Must Boost Exports

Lower financing costs alone will not guarantee sustainable growth.

The assessment calls for concessionary loans, public-private partnerships and foreign investment to focus on productive sectors. Projects should aim to generate exports or replace imports rather than fuel another consumption-driven import cycle.

Pakistan could develop value-added industries around cotton, copper, limestone, rock salt and agriculture.

The Reko Diq mining project could also support downstream industries, including refining, metal fabrication, laboratories and engineering services in Balochistan when economic and energy conditions justify further investment.

SIFC Could Drive Productivity Reforms

The Special Investment Facilitation Council (SIFC) could also evolve into a broader productivity platform.

Proposed reforms include linking tax, customs, property and banking data, expanding electronic invoicing, improving open contracting, disclosing beneficial ownership and digitising land records.

Commercial courts with enforceable timelines could also strengthen investor confidence.

Cumulative Roshan Digital Account inflows have reached $13.65 billion. These funds could increasingly support diaspora bonds and export-oriented investment rather than short-term consumption.

The central challenge for Pakistan is therefore to make economic reform independent of political cycles. Sustaining fiscal discipline, improving institutions and converting investment into productive capacity could provide the foundation for the next sovereign rating upgrades.