Pakistan's Remarkable Decline in Sovereign Default Risk

Pakistan has recently emerged as the second most improved economy globally in terms of reducing sovereign default risk, according to Bloomberg data. This significant turnaround, occurring from June 2024 to September 2025, has seen the country’s Credit Default Swap (CDS)-implied default probability drop by an impressive 2,200 basis points. This decline positions Pakistan just behind Turkey in the Global Emerging Market (EM) Rankings for default risk reduction.

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The sharp decrease in default risk reflects a combination of macroeconomic stabilization, structural reforms, and adherence to the International Monetary Fund (IMF) program. Key measures include timely debt servicing, improved fiscal management, and enhanced revenue collection. Khurram Schehzad, Adviser to the Finance Minister, emphasized that Pakistan is the only country in the emerging market sample to demonstrate consistent quarterly improvement in default risk over the past year.

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The government’s commitment to structural reforms has played a critical role in this progress. These reforms have included tightening fiscal controls, rationalizing subsidies, and improving governance in public institutions. Additionally, coordination between the central bank and the finance ministry has helped maintain monetary stability, further enhancing investor confidence.

Pakistan’s Default Risk Hits Record Low Level

In contrast to Pakistan's progress, several other emerging markets, including Argentina, Egypt, and Nigeria, have experienced rising default risks during the same period. This divergence highlights Pakistan's unique position as a country successfully reversing a prolonged cycle of risk perception. The CDS data indicates that while Pakistan's risk profile has improved, other nations have struggled with currency depreciation and weak fiscal management.

Pakistan Sees World’s 2nd Sharpest Drop in Default Risk

Schehzad noted that the decline in default risk signals strengthening investor confidence in Pakistan's economic direction. He attributed this shift to the government’s disciplined approach to fiscal management and the positive actions taken by international credit rating agencies, including upgrades from S&P Global, Fitch, and Moody’s. These developments have contributed to a more favorable view of Pakistan among global investors.

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Despite the positive trends, challenges remain. Some analysts caution against over-reliance on local banks to absorb local debt issuance, particularly during periods of stress. They urge reforms to enhance transparency in debt issuance and attract a more diverse range of investors. Additionally, while the improvements are notable, the government must continue to address underlying economic vulnerabilities to sustain this momentum.

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Looking ahead, the government aims to maintain its reform momentum and improve the tax-to-GDP ratio, targeting 11%. Continued discussions with the IMF are expected to focus on enhancing fiscal space and ensuring sustainable growth. If these reforms persist, Pakistan could solidify its position as a stable investment option, fostering greater foreign inflows and a more diversified economy.

Pakistan’s Default Risk Hits Record Low Level

• “Pakistan is steadily rebuilding market credibility, standing out as one of the most improved sovereign credit stories in the emerging market universe.” — Khurram Schehzad, Adviser to the Finance Minister

Dawn

• “He noted that this marks the sharpest decline among major EMs, ahead of South Africa (3%), EI Salvador (2%).” — Khurram Schehzad, Adviser to the Finance Minister

Express Tribune

• “Pakistan’s story is no longer about risk, it’s about recovery and reform.” — Khurram Schehzad, Adviser to the Finance Minister

Pakistan’s Default Risk Hits Record Low Level

In summary, Pakistan's recent economic improvements signify a critical shift in investor sentiment, driven by effective policy measures and structural reforms. However, ongoing vigilance and commitment to reform will be essential to maintain this positive trajectory.

Pakistan slashes default risk, emerging markets take notice