SBP Monetary Policy Decision

July 27, 2026 (MLN): The recent upgrade of Pakistan's credit rating by S&P to ‘B’ (up from ‘B-’) with a Stable outlook confirms the stabilisation achieved under the IMF, but it does not create any opportunity for a rate reduction.

Nonetheless, the rising oil prices are of significant concern since Pakistan is heavily reliant on imported energy, which continues to be a structural vulnerability.

Exports have fallen significantly short of expectations, missing targets by $ 5.2 billion in FY26. This shortfall hinders foreign exchange earnings, worsening the trade deficit and increasing dependency on remittances and other foreign inflows.

Consequently, securing financing remains a challenge, making it difficult to maintain foreign exchange reserves at healthy levels without constant borrowings.

Despite these challenges, the economy is currently in a stronger position compared to 2-3 years ago. Reserves are being rebuilt, the fiscal situation has improved, and credibility has undoubtedly increased, as evidenced by S&P's upgrade, which helps silence critics.

The SBP’s decision to tighten monetary policy to 11.5% is likely aimed at managing these risks.

The upcoming Monetary Policy Committee meeting may highlight the importance of data dependence along with geopolitical and commodity risks.

A primary concern for SBP policymakers is the sharp rise in headline inflation, which surged from 7.3% in March to 10.9% in April and 11.7% in May 2026, driven by increased energy prices, transport costs, and wheat/product prices amid tensions in the Middle East.

Therefore, in spite of rising oil prices, it is expected that in order to reach a growth target of 3.5% for the upcoming fiscal year, the SBP may find it premature to adjust the policy rate, and as a result, it is likely to stay steady at 11.5%.

S&P Global Ratings has recently raised Pakistan's long-term sovereign credit rating to 'B' from 'B-' with a stable outlook as of July 22, 2026, which is positive news.

However, it’s important to note that a 'B' rating falls into the speculative-grade (or "junk") category, significantly below the investment-grade threshold (BBB-).

This upgrade reflects advancements in foreign exchange reserves, primary surpluses, and the debt-to-GDP ratio, as well as positive outcomes from IMF reviews, yet the nation’s credit profile remains vulnerable.

Improved ratings can lower sovereign borrowing costs, enabling Pakistan to potentially re-enter international capital markets for Eurobonds or syndicated loans. A reduction in external financing costs could benefit trade finance and banks' interbank operations.

Despite the 'B' rating, Pakistan remains in a high-risk category, unable to tolerate any lapses in policy or reforms.

Continuous reform efforts are crucial in areas such as tax policy (with a need to raise the low tax-to-GDP ratio to around 13%–15%), energy tariffs (which are consistently rising), and expenditure control, as any shortcomings could quickly impact the rating negatively.

External vulnerabilities and financial dependence are also significant risks, particularly the reliance on IMF disbursements and bilateral rollovers from Saudi Arabia, the UAE, China, and others.

Higher oil prices and ongoing tensions in the Middle East pose ongoing threats, alongside border tensions with India and Afghanistan.

Thus, it is vital for Pakistan to strive toward achieving a 'BB' rating over time. A crucial focus area is enhancing the tax base through improved documentation, and targeting sectors such as retail, wholesale, and agricultural income tax wherever feasible.

Sustaining credible primary surpluses while controlling expenditures is essential. Building foreign exchange reserves for at least four months of imports, along with a buffer for shocks, is necessary.

Improvements to the current account through exports are important, and despite the State Bank of Pakistan maintaining remittance targets, global uncertainties and unrest in the Middle East require careful management.

Domestic debt management is another concern that needs addressing, with a focus on extending average maturities and reducing the reliance on expensive short-term debt. The government must ensure that ongoing tax reforms are not reversed for short-term political gains, as this would be harmful.

While the upgrade to 'B' alleviates some immediate pressures, Pakistan is still not in a secure position and must pursue deeper, ongoing reforms.

It’s crucial to recognise that simply creating agencies isn't enough. Sustained actions and reforms are needed to reach the next level, such as 'BB-' or 'BB', which may take approximately 2–4 years, if the required measures are taken.

Thus, structural improvements are required across five well-known areas: institutional and political, economic, fiscal, external, and monetary and financial stability. S&P has already indicated that further advancements depend on strengthening fiscal and external metrics structurally.

Revenue mobilisation to increase the tax-to-GDP ratio decisively (targeting 13–15% in the next couple of years) is essential. Controlling expenditures and reducing the debt-to-GDP ratio to around 65% is also necessary. Rating agencies look for rising revenue as a percentage of GDP while seeking lower financing costs.

Efforts should focus on boosting GDP growth to about 5% or more, shifting growth beyond reliance on consumption and remittances. Consequently, boosting exports, with an aim of increasing by at least 25% annually, is critical.

Core reforms must continue without political interference or policy changes. More broadly, there should be no policy reversals for at least the next 12 months, ensuring that the tax-to-GDP ratio, foreign exchange reserves, and primary reserves remain stable throughout this period.

With strong execution, reaching 'BB-' within 2–3 years and 'BB' within 4-5 years is achievable, assuming the economy remains unaffected by major external shocks.

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