By Moaaz Manzoor

Pakistan’s economic growth improved to 3.1% in FY25, reflecting a gradual recovery supported by stabilizing macroeconomic conditions and coordinated policy measures, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report shows that GDP growth increased from 2.6% in FY24, indicating a strengthening of economic activity after a period of significant macroeconomic stress. The recovery gained further traction during the later part of the year, with national output expanding by 3.8% in the first half of FY26, suggesting that the growth momentum has continued into the current fiscal period.

The SBP attributed the improvement to a combination of prudent monetary policy, fiscal consolidation, and better external sector conditions. Inflation declined significantly during 2025, easing pressure on households and businesses, while exchange rate stability and strengthening foreign exchange reserves helped restore confidence in the economy. These developments created a more predictable environment for economic activity and supported both consumption and investment.

Progress under the International Monetary Fund programme also played an important role in stabilizing the economy. Successful completion of programme reviews and continued engagement with international financial institutions helped unlock external financing and improve investor sentiment. The report notes that these developments contributed to a reduction in country risk premiums and supported Pakistan’s credit rating outlook during the year.

Sector-wise, the recovery was supported by improved performance across key segments of the economy. Lower inflation helped boost real incomes and consumption, while easing financial conditions toward the latter part of the year supported industrial and business activity. The report also highlights that favorable global commodity prices reduced input costs, particularly for energy and food, which had previously constrained economic performance.

The financial sector also played a supportive role in the recovery. A stable and well-capitalized banking system ensured the availability of liquidity and maintained confidence in financial intermediation. Strong deposit growth and improved asset quality in the banking sector contributed to a more stable financial environment, which is essential for sustaining economic expansion.

External sector stability further reinforced growth prospects. Despite a widening trade deficit, strong remittance inflows and improved financial account balances helped contain the current account deficit. These factors, along with strategic foreign exchange interventions, contributed to exchange rate stability, which in turn supported overall macroeconomic balance.

The report also indicates that easing inflation created room for a reduction in policy rates, which has started to improve credit conditions. Lower borrowing costs are expected to support private sector activity going forward, particularly in investment-sensitive sectors, thereby strengthening the growth outlook.

However, the SBP cautioned that risks to growth remain, particularly from external factors such as geopolitical tensions, global financial market volatility, and potential increases in commodity prices. Any deterioration in global conditions could affect Pakistan’s external sector and dampen economic momentum.

Sustaining the recovery will depend on continued policy discipline, progress in structural reforms, and efforts to improve productivity and export competitiveness. Maintaining macroeconomic stability remains essential to ensuring that the recent gains in growth translate into a durable and inclusive economic expansion.

Credit: INP-WealthPk