Pakistan’s upgrade by S&P from B- to B reflects improved sovereign debt sustainability achieved through strict adherence to IMF-mandated fiscal discipline, stronger reserves, higher remittances and reduced fiscal deficits. While these measures have reassured creditors, they have imposed significant domestic costs through high interest rates, rising energy tariffs, heavier taxation and stagnant real wages. Economic growth, though improving, remains insufficient to generate adequate employment or deliver broad prosperity. The article argues that the upgrade signals enhanced debt-servicing capacity rather than genuine economic recovery. Unless structural reforms broaden the tax base and improve productivity, the present stability may prove only temporary.
When S&P Global Ratings raised Pakistan's sovereign credit rating from 'B-' to 'B' with a stable outlook on 22 July, its highest level in eight years, the government treated it as vindication of its effective fiscal management. In a sense, it was. This is the country's first sustained credit recovery in years, the product of grinding and rigid compliance with a US$7 billion, 37-month IMF Extended Fund Facility approved in late 2024.
A credit rating shows whether a government can pay its debts. It is not about whether people can afford basic living expenses. Credit ratings measure repayment capacity, not developmental performance. From this perspective, as well as a more human measure, Pakistan's stabilisation looks less like recovery than a very expensive way of ‘standing still’ for most households. Inflation has cooled from its 2023-24 peaks, but the damage it did to real incomes has not been reversed. Interest rates remain punishing for the people at large. Energy bills keep climbing. Though the upgrade is there and, by some measures, it looks impressive, the larger question it has given rise to is: why is it not visible on the ground?
How the numbers were made to work
It is equally important to look into what actually improved, because it is substantial. The State Bank of Pakistan's reserves have climbed from US$6.7 billion in late 2022 to roughly US$24-25 billion by mid-2026, helped along by remittances that hit a record US$41.6 billion during the 2025-26 fiscal year, up from US$38.3 billion the year before. GDP growth came in at 3.7% for FY2025-26, the strongest in four years, up from 3.08% the year prior. On the fiscal side, discipline has been genuinely aggressive: the government posted a primary surplus in the 3.2-3.5% of GDP range, by some measures a 21-year record, and the overall fiscal deficit narrowed sharply from where it stood two years ago.
None of this happened by accident. It happened because Islamabad complied with IMF recommendations, even if some of these were politically costly: phasing out untargeted fuel and energy subsidies, pushing tax collection up toward 10-11% of GDP, and letting the exchange rate float freely enough to choke off speculative demand for dollars. Other countries, too, came to Pakistan’s rescue. Saudi Arabia has extended substantial financial support to Pakistan through deposits with the State Bank of Pakistan, including a US$5 billion deposit and a further commitment of US$3 billion announced in 2026, taking Saudi support to US$8 billion. China, meanwhile, has continued to provide around US$4 billion in financial support through deposits and related central bank facilities. Pakistan has also regained access to international capital markets, successfully issuing its inaugural Panda bond in China’s domestic bond market in 2026, while preparing to return to the Eurobond market as its credit profile improves.
From the perspective of bondholders, this is precisely what a successful stabilisation programme is expected to achieve—arguably exceeding even the expectations of its architects. Yet the very policy instruments that delivered this macroeconomic stabilisation are also the ones now constraining domestic growth, exposing the inherent trade-off between restoring financial stability and sustaining economic expansion.
The Cost of Compliance
Here, the contradiction looks even more striking, now that the growth number is stronger than it was expected, i.e., at 3.7%, the fastest pace in four years. Pakistan is still nowhere near the 6-7% growth economists say is needed to absorb the nearly two million young people entering its labour force annually. Thus, the current rate of acceleration is inadequate. The central bank projects economic growth of only 3.5–4.5% for the coming fiscal year, underscoring the economy’s continued fragility. At the same time, the government’s commitment to the IMF programme requires it to maintain a tight macroeconomic stance—characterised by elevated interest rates, fiscal discipline, and stronger tax mobilisation. These constraints leave little room for demand-stimulating measures, making it difficult to accelerate growth to the 6–7% range typically associated with robust employment generation and sustained economic expansion.
Energy is yet another domain where this shows up most visibly. In order to bring down circular debt in the power sector, still around PKR 1.84 trillion (US$6.62 billion) as of early 2026, the government has repeatedly executed steep hikes to the base tariff under pressure from the IMF's policy and stripped away industrial subsidies. That's fiscally sound and commercially painful. Small and Medium Enterprises (SMEs) margins have been crushed, and Pakistani textile exporters, already competing against cheaper regional producers, have gotten less competitive rather than more. Monetary policy tells a similar story. The State Bank lowered interest rates from a 2023-24 peak near 22-23% to 10.5% earlier this year. However, in April this year, the State Bank blindsided commercial markets, which were universally expecting a pause or further cuts, by executing a sharp hike back up to 11.5% against the backdrop of West Asia-driven oil price shocks.
On the household side, even as inflation has cooled on paper, years of cumulative price increases, on top of higher sales taxes and petroleum levies, have left real wages nowhere near where they were earlier. The real wages in Pakistan are estimated to be 20% to 30% lower than they were three years ago. This precisely accounts for the widespread public frustration, occurring at the exact moment macroeconomists are celebrating the fiscal turnaround. Thus, the instruments that stabilise the balance of payments are, in Pakistan's current structure, largely the same instruments that squeeze households and firms.
Who actually pays for stability
This raises the question that the rating agencies do not ask: who is bearing the cost? The answer based on facts is quite revealing. Pakistan’s salaried workers paid a massive PKR 633 billion (US$2.28 billion) in income taxes during the 2025–26 fiscal year, an increase from PKR 585 billion (US$2.11 billion) the previous year. Unlike business owners, these regular employees are fully recorded by the government and have their taxes taken directly from their pay-checks. Agriculture, by contrast, generates something close to a quarter of GDP and pays a tax rate close to negligible by comparison. Real estate and large parts of the retail sector remain, for all practical purposes, outside the net. This essentially means that the record fiscal surplus the government is celebrating was financed disproportionately by the people with the least power to resist it.
The government of Prime Minister Shehbaz Sharif has taken the tougher route by going after IMF benchmarks instead of relying on momentary popularity. The combination of austerity and no visible social dividend can likely bolster the public’s frustration. When energy bills and tax surcharges hit the pockets of millions of voters on a regular basis, they curdle into an anti-incumbency sentiment. They then snowball into instability that can ultimately undo the very stabilisation they were meant to protect.
What 'B' actually means.
It's worth being precise about what this upgrade is and is not. A 'B' rating sits squarely in speculative-grade territory, a long way below the investment-grade tier where a sovereign is considered broadly self-sustaining. S&P says that Pakistan has removed the immediate risk of default and is outperforming on the important numbers for creditors. As such, this does not mean that the country’s economy has become healthy. The reserves driving this recovery still rely heavily on renewed commercial credit lines and rolled-over bilateral deposits, not on a structurally larger export base. S&P itself has flagged continued reliance on rollovers as a condition of the upgrade.
Conclusion
The 'B' credit upgrade is not a declaration of economic health. It is rather a proof that Islamabad is effectively navigating the metrics that its foreign creditors care about, while remaining completely disconnected from the financial pain felt by most of its citizens. What has truly changed is that Pakistan has bought itself crucial breathing room to pursue structural reform, although at a heavy, unevenly distributed cost borne by its own population. Whether policymakers utilise this narrow window to dismantle deep-seated structural distortions or simply coast until the next external shock hits remains the central, defining question. Whatever the case be, the sovereign upgrade is not a turning point. It is a temporary reprieve that leaves the underlying domestic reality, in essence, precarious.
The more fundamental question, therefore, is whether the present stabilisation can evolve into sustainable development. That depends not on continued fiscal compression alone but on politically difficult structural reforms—broadening the tax base to include agriculture, real estate and wholesale trade, improving export competitiveness, reducing energy-sector inefficiencies, and attracting productivity-enhancing investment. Without such reforms, Pakistan risks becoming trapped in a familiar cycle: periodic external crises followed by IMF-assisted stabilisation, temporary improvements in sovereign creditworthiness, and renewed vulnerability when the next external shock arrives. The current credit upgrade should thus be viewed as an opportunity to undertake deeper reforms rather than as evidence that the underlying economy has fundamentally turned the corner.
Mohammed Shoaib Raza is a PhD scholar at the School of International Studies, Jawaharlal Nehru University, New Delhi. The views expressed here are his own.
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