Pakistan’s Default Risk Drops 93% as CDS Spreads Hit Lowest Level in Years

Pakistan’s sovereign default risk has significantly reduced by 93%, with 5-year CDS spreads dropping to 505 basis points in December 2024, down from a high of 12,388 basis points in November 2022. This sharp decline reflects a recovery in Pakistan’s debt stability, driven by better macroeconomic conditions and rising investor confidence.

Mr. Khurram Schehzad, Advisor to Finance Minister has said, “The decline in country risk premiums provides a timely opportunity for Pakistan to plan and re-enter global capital markets, particularly with global interest rates on the decline. Lower borrowing costs and increased liquidity will help alleviate external pressures further, thereby strengthening Pakistan’s external position and boosting its economic prospects.”

He also highlighted that the CDS recovery positions Pakistan favorably compared to numerous emerging and frontier markets regarding risk premiums. The improvement has been credited to enhanced debt management, increased foreign reserves, and a commitment to fiscal discipline.

Schehzad highlighted that the prevailing global economic landscape, marked by declining interest rates, offers a favourable moment for Pakistan to re-engage with international capital markets at reduced borrowing expenses. The return to the market, along with a rise in available funds, is anticipated to alleviate external funding challenges and enhance economic outlooks.

Increased investor optimism has spurred a rally in Pakistan’s international bonds, reinforcing market sentiment about the country’s financial stability. This shift highlights Pakistan’s effective execution of reforms supported by the IMF through the Extended Fund Facility (EFF), which tackled essential fiscal and external challenges.

In 2022, Pakistan experienced a significant surge in CDS spreads, reaching unprecedented levels due to declining reserves, increasing external debt commitments, and mounting global economic challenges. A year later, rapid fiscal tightening, a decrease in inflation, and stable foreign currency reserves have significantly alleviated worries about sovereign default.

However, experts remain cautious, highlighting the importance of ongoing structural reforms to ensure stability is upheld. The latest report from the IMF highlights the necessity of expanding the tax base, addressing debt risks, and promoting growth driven by the private sector as essential steps for Pakistan to attain sustainable economic stability.

Pakistan’s enhanced credit profile places it in a strong position to draw in foreign investment and stimulate economic recovery. The notable drop in CDS spreads indicates a major transition from default risk to enhanced global market access, highlighting a pivotal moment in the nation’s financial recovery.