Pakistan’s Deficit Hits 22-Year Low — But Its Debt Stock Just Rose Again

S&P upgraded Pakistan’s credit rating to ‘B’ as its fiscal deficit hit a 22-year low — even as central government debt rose Rs5.7 trillion. Here’s how both are true.

Pakistan’s economic story this summer is two numbers that look contradictory but aren’t. Per Business Recorder’s economy coverage, Pakistan’s fiscal deficit fell to a 22-year low of 2.6% of GDP in FY2025-26 — a headline that would normally read as unambiguous good news. Nearly the same reporting notes Pakistan’s central government debt stock rose by Rs5.7 trillion during the same fiscal year — a figure that, in isolation, looks like the opposite story.

Both are accurate. Understanding why requires separating the flow (this year’s deficit) from the stock (total accumulated debt).

Key Takeaways

• S&P Global Ratings upgraded Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-‘ on July 22, 2026.
• Pakistan’s fiscal deficit fell to a 22-year low of 2.6% of GDP in FY2025-26.
• Despite the improved deficit ratio, Pakistan’s central government debt stock rose by Rs5.7 trillion during the same fiscal year.
• The KSE-100 has posted a parallel record run, reflecting investor optimism that hasn’t fully priced in the debt-stock trend.
• A ‘B’ rating remains firmly speculative-grade — the upgrade signals direction of travel, not investment-grade market access.

The credit-rating context frames why international investors are treating the deficit improvement as credible. Business Recorder’s coverage confirms S&P Global Ratings upgraded Pakistan’s long-term sovereign credit rating to ‘B’ from ‘B-‘ on July 22, 2026 — the kind of one-notch move that rarely makes global headlines on its own but matters to institutional investors whose mandates key off rating thresholds.

A ‘B’ rating needs context many searchers lack: it remains firmly speculative-grade, several notches below investment grade. The significance isn’t that Pakistan has “arrived” — it’s the direction of travel after a period when the rating trajectory pointed the other way.

The deficit figure deserves similar precision. A 2.6%-of-GDP fiscal deficit — the lowest in 22 years — reflects primarily disciplined current spending and improved tax collection relative to GDP, the kind of structural improvement IMF program conditions have specifically targeted. It’s a flow measure: how much more government spent than it collected in FY26 alone.

The debt stock is a different, cumulative measure — total outstanding government debt built up over decades, which can rise even in a year the deficit narrows. That happens through several channels: interest payments on existing debt compounding the principal, currency depreciation raising the rupee value of foreign-currency debt, and one-off financing needs (like flood-related spending) sitting outside the core deficit calculation. A rising debt stock alongside a shrinking deficit is therefore not a contradiction — it’s what a country climbing out of a debt overhang while still servicing historical borrowing looks like in the numbers.

This tension sits inside a broader stabilisation narrative built over more than a year: Pakistan’s IMF Extended Fund Facility program, a comparatively stable currency after prior volatility, and headline growth figures the government has pointed to as evidence of a turnaround. Per Wikipedia’s Economy of Pakistan data page, sourced from national statistics, GDP growth is estimated at 3.7% in 2026, inflation around 3%, with a labour force of roughly 78.9 million and unemployment near 6.9%.

Markets have responded with more enthusiasm than the debt-stock figure alone might suggest is warranted — the KSE-100’s continued record run this year reflects optimism priced substantially around the deficit-and-rating story rather than the debt-stock caveat (see Article 14 for the full index story).

Why It Matters

For a country whose recent history has been defined by repeated balance-of-payments crises, a credit upgrade paired with a record-low deficit is a meaningful signal to the market participants who decide how expensive Pakistan’s next Eurobond or external financing round will be. But the debt-stock trend determines how much of any future improvement gets eaten by interest costs before it reaches development spending.

Data and Evidence

• S&P rating: upgraded to ‘B’ from ‘B-‘ (July 22, 2026)
• Fiscal deficit: 2.6% of GDP, a 22-year low (FY2025-26)
• Central government debt stock increase: Rs5.7 trillion (FY2025-26)
• GDP growth: 3.7% (2026 estimate); Inflation (CPI): ~3% (2026)
• Nominal GDP: $452.1 billion (2026 estimate)

Global Impact

A sustained Pakistan fiscal turnaround has read-through for regional creditors and Gulf partners who provided bridge financing during past crises, and for global bond investors assessing frontier-market risk as several emerging economies pursue similar IMF-anchored stabilisation paths.

What Happens Next

Watch how rating agencies treat next fiscal year’s numbers once flood-related reconstruction spending works through the accounts, and whether debt-stock growth decelerates as disciplined primary balances compound over multiple years.

Frequently Asked Questions

What does Pakistan’s ‘B’ credit rating mean? A one-notch upgrade from ‘B-‘, still deep speculative-grade, but signaling improving creditworthiness. How can the deficit fall while debt rises? The deficit is one year’s shortfall; debt stock is cumulative and can grow from interest costs and currency effects even as the annual deficit narrows. Is Pakistan’s economy out of crisis? Meaningful stabilisation is visible, but the rating level and rising debt stock show underlying vulnerabilities remain. What’s driving the KSE-100’s run? Investor optimism tied to the fiscal deficit improvement, rating upgrade and broader IMF-program stabilisation. Why did S&P upgrade now? It reflects improved fiscal discipline and macro stabilisation trends built over the prior year rather than a single event.