Major Shift in Economic Outlook
Pakistan has recorded one of the sharpest declines in sovereign default risk worldwide, marking a major turnaround in its financial outlook and investor sentiment. According to Bloomberg data based on Credit Default Swap (CDS) probabilities, Pakistan now ranks as the second-best performer globally, just after Turkiye.
This shift reflects growing market confidence in Pakistan’s economic direction, particularly after months of fiscal uncertainty and external debt pressure. Improved repayment capacity, stronger reserves, and adherence to reform commitments have started to reshape the country’s image among international investors and rating agencies.
Consistent Progress Over 15 Months
Adviser to the Finance Minister, Khurram Schehzad, highlighted that Pakistan is the only country to show uninterrupted improvement in its default risk for 15 consecutive months, from June 2024 to September 2025.
During this period, Pakistan’s default probability improved by 2,200 basis points, a trend that few economies have matched. This steady improvement signals a return of market trust in Pakistan’s fiscal management and debt sustainability.
Schehzad explained that consistent efforts to control the fiscal deficit, enhance revenue collection, and prioritise debt servicing have been key to maintaining momentum. The shift also suggests that policy continuity and disciplined budgeting are finally translating into measurable financial stability.
Reforms Restoring Confidence
Schehzad noted that Pakistan is no longer viewed through the narrow lens of default risk, describing the country as a “reform-driven and resilient economy.”
He credited this transformation to the government’s structural reforms, including tighter fiscal controls, rationalised subsidies, and improved governance in key public institutions. Moreover, coordination between the central bank and the finance ministry has helped maintain monetary stability and prevent inflationary shocks.
IMF-supported stabilisation programs have further reinforced Pakistan’s credibility, signalling that the government is committed to long-term reform rather than short-term relief. According to Schehzad, these reforms are gradually rebuilding the foundation for sustainable economic recovery and renewed global confidence.
Comparison with Other Economies
In contrast, several emerging markets have struggled to maintain financial stability over the same period. Countries such as South Africa and El Salvador showed limited improvement in default risk, while Argentina, Egypt, and Nigeria faced deteriorating indicators due to currency depreciation, rising inflation, and weak fiscal management.
Against this backdrop, Pakistan’s progress stands out. Its ability to show quarter-on-quarter improvement despite political uncertainty and external pressures demonstrates that its policy measures are gaining traction. The data highlights Pakistan as one of the few emerging economies reversing a prolonged cycle of risk perception, a rare achievement in the current global environment.
What CDS Tells Us
The Credit Default Swap (CDS) probability is a key barometer of a nation’s creditworthiness. It reflects the market’s perceived risk of a country failing to meet its debt obligations. A decline in CDS prices indicates reduced investor anxiety and greater faith in the government’s repayment ability.
For Pakistan, falling CDS spreads mean that investors now view its debt profile as more manageable and its policy path as credible. This also reduces borrowing costs in international markets, making it easier for the country to attract foreign investment and issue sovereign bonds in the future.
In essence, the CDS trend not only measures current sentiment but also predicts the direction of investor confidence, and for Pakistan, that direction is clearly improving.
Improved Ratings and Market Standing
Schehzad attributed Pakistan’s turnaround to timely debt servicing, strict IMF compliance, and favourable updates from major rating agencies such as S&P Global, Fitch, and Moody’s. These improvements have helped Pakistan rebuild credibility in global credit markets, where perception often plays as critical a role as fundamentals.
He emphasised that Pakistan is now seen as one of the most improved sovereign credit stories in the developing world. The government’s success in avoiding default, meeting external obligations, and stabilising the exchange rate has sent a strong message to investors.
As Schehzad put it, “Pakistan’s story is no longer about risk, it’s about recovery and reform.” This growing confidence could translate into greater foreign inflows, stronger equity markets, and improved access to international financing.
Outlook and Future Stability
Despite facing major challenges such as flood-related reconstruction costs and global commodity price volatility, the IMF remains confident in Pakistan’s near-term economic outlook. The Fund expects no significant setback to growth or revenue collection in the current fiscal year.
The government is continuing to expand the tax base, reduce energy losses, and promote local gas exploration to enhance fiscal space. Additionally, efforts to digitise tax collection and improve public-sector efficiency are underway to ensure sustainable growth.
If these reforms continue, Pakistan could enter a phase of stable recovery, with lower inflation, higher investor trust, and a more diversified economy. The recent decline in default risk is therefore not just a technical improvement; it represents a broader shift toward economic resilience and fiscal credibility.
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