By Moaaz Manzoor

Geopolitical risks were identified as the most significant threat to Pakistan’s financial stability in 2025, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report, based on the central bank’s Systemic Risk Survey conducted in January 2026, indicates that global geopolitical tensions ranked as the top risk both at present and over the next six months. Respondents, including financial experts and market participants, highlighted the potential spillover effects of international conflicts on Pakistan’s economy and financial system.

The survey results show that geopolitical risks were followed by concerns related to domestic geopolitical conditions, commodity price volatility, climate-related disasters, and cybersecurity threats. These risks collectively form a complex environment that could impact financial markets, external sector stability, and overall economic performance.

The SBP noted that geopolitical developments can affect Pakistan through multiple channels, including fluctuations in global commodity prices, disruptions in trade flows, and shifts in investor sentiment. In particular, prolonged conflicts in key regions could push up oil prices, raise import costs, and reignite inflationary pressures, potentially undermining macroeconomic stability.

The report highlights that external vulnerabilities remain a key concern for the economy, despite improvements in macroeconomic indicators during 2025. While foreign exchange reserves strengthened and the current account deficit remained contained, the economy continues to be sensitive to global shocks.

Geopolitical risks also have implications for financial markets, as heightened uncertainty can lead to volatility in capital flows and exchange rates. The report notes that investor confidence can be affected by global developments, influencing both domestic and foreign investment decisions.

In addition to geopolitical risks, the survey identified domestic terrorism and social unrest as potential threats to financial stability. These risks, although lower ranked compared to global factors, still pose challenges for maintaining a stable economic environment.

The SBP emphasized that managing these risks requires a proactive and coordinated policy approach. Strengthening macroeconomic fundamentals, maintaining adequate foreign exchange reserves, and ensuring policy consistency are critical for mitigating the impact of external shocks.

The report also suggests that improving economic resilience through structural reforms and diversification of the economy can help reduce vulnerability to geopolitical risks over the long term. Enhancing export competitiveness and reducing reliance on imported commodities are key areas of focus in this regard.

While geopolitical risks remain elevated, the SBP noted that the financial sector is better positioned to absorb potential shocks, supported by strong capital buffers, improved liquidity conditions, and effective regulatory frameworks.

Credit: INP-WealthPk