Pakistan recorded the sharpest drop in default risk on Sunday, October 5, 2025, with its credit default swap-implied probability falling 2,200 basis points over 15 months, per Bloomberg data. Adviser Khurram Schehzad to the Finance Minister shared this on X. The development stems from reforms and IMF support. It boosts investor trust.
This Pakistan default risk reduction eases pressures on South Asia’s largest economy, which influences regional trade and remittances worth over $30 billion annually. Stable finances in Pakistan could stabilise currency fluctuations across borders, aiding neighbours like India and Bangladesh in managing shared economic shocks from global volatility.
Pakistan CDS Decline Signals Sovereign Risk Improvement
Pakistan’s CDS spread has tumbled, reflecting a marked sovereign risk improvement. The five-year CDS-implied default probability dropped from peaks above 59 per cent in mid-2024 to around 37 per cent by September 2025. This marks the sharpest drop in default risk among major emerging markets.
Khurram Schehzad highlighted the trend in a post on X. “Pakistan stands out globally as the 2nd most improved economy in terms of reduction in sovereign default risk, as measured by CDS-implied default probability globally,” he stated. He noted the country ranks second only to Turkiye in global emerging market rankings for default risk reduction.
The Pakistan Economic Survey 2024-25 corroborates this data. It reports the five-year CDS spread fell from over 12,000 basis points in late 2022 to about 500 basis points by end-2024. This decline underscores broader Pakistan CDS decline, tied to rising foreign exchange reserves and fiscal discipline.
Schehzad attributed the progress to macroeconomic stabilisation. “This sharp decline in country’s risk signals strengthening investor confidence, underpinned by structural reforms, timely debt servicing, and staying the course with the IMF program,” he added. Pakistan met all external debt obligations in fiscal year 2025, bolstering its position.
Comparison with Emerging Market Peers
Pakistan leads in consistent gains. It outpaces South Africa, with a three per cent default probability drop, and El Salvador at two per cent. In contrast, Argentina, Egypt, and Nigeria saw rises in default risks over the same period.
This positions Pakistan as the only emerging market with quarterly improvements for a full year. The 2,200 basis points reduction highlights the sharpest drop in default risk, per Bloomberg Intelligence metrics.
Factors Behind Pakistan Default Risk Reduction
Several elements drive this Pakistan sovereign risk improvement. Progress under the IMF Extended Fund Facility stands central. Pakistan completed the first review on schedule in May 2025, securing a $1 billion disbursement.
Foreign exchange reserves climbed to $14.3 billion by July 25, 2025, covering ten weeks of imports, up from $9.4 billion a year earlier. This buffers external shocks.
Global rating agencies echoed the optimism. Moody’s upgraded Pakistan’s local and foreign currency issuer ratings to Caa1 from Caa2 on August 13, 2025, with a stable outlook. “The upgrade to Caa1 reflects Pakistan’s improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility program,” Moody’s stated.
The agency noted fiscal consolidation efforts. Pakistan’s fiscal deficit narrowed to 5.4 per cent of GDP in fiscal year 2025, from 6.8 per cent prior. A primary surplus of 2.4 per cent of GDP marked the second straight year.
Positive actions from S&P and Fitch further aided the Pakistan CDS decline. These upgrades lowered borrowing costs. International sovereign bonds rallied, with the 2029 Eurobond rising to 92 cents on the dollar by December 2024, from 77 cents earlier.
Schehzad messaged investors: “Pakistan is steadily rebuilding market credibility, standing out as one of the most improved sovereign credit stories in the emerging market universe.”
Background
Pakistan faced acute challenges in 2023. Foreign reserves hit critically low levels, sparking a balance-of-payments crisis and default fears. The IMF released a key loan tranche, averting collapse. Aid from China, Saudi Arabia, and the UAE totalled billions in support.
Post-crisis, Islamabad pursued IMF-prescribed reforms. These included tax base expansion and energy sector fixes. Inflation eased from 30.8 per cent in 2023 to 12.6 per cent in 2024. The State Bank cut rates from 22 per cent to 11 per cent by May 2025.
The KSE-100 index surged 50.2 per cent to 117,807 points by March 2025, drawing Rs 171.3 billion in net inflows to national savings schemes after years of outflows. Market capitalisation grew 38.5 per cent to Rs 14,374 billion ($51.30 billion).
This foundation enabled the current Pakistan default risk reduction. Early debt repayments of Rs 2,600 billion reduced rollover risks and saved over Rs 850 billion in interest costs.
What’s Next
Sustained reforms could yield further gains. Moody’s projects the fiscal deficit at 4.5-5 per cent of GDP in fiscal year 2026. Continued IMF engagement may unlock more funding from multilaterals like the Asian Development Bank, which lent $1 billion in June 2025.
Investors watch for tariff adjustments and hydropower resolutions, such as at Neelum-Jhelum. A stable political environment will aid the Pakistan sovereign risk improvement.
As Pakistan cements its trajectory, this sharpest drop in default risk paves the way for deeper market access and enduring economic resilience.
Published in SouthAsianDesk, October 6th, 2025
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