By Farooq Awan
After years of turbulence, Pakistan is stepping into fiscal year 2025–26 on more stable economic ground.
With inflation at an eight-year low, a current account surplus, and growing foreign exchange reserves, the State Bank of Pakistan (SBP) says the country’s economy is finally showing signs of steady recovery — but warns that floods and global trade tensions could threaten this progress.
SBP Sees Continued Stability Ahead
According to the SBP’s Annual Report 2024–25, Pakistan’s economic stability is expected to continue, helped by cautious monetary policy, tight fiscal control, and reforms under the IMF program.
These factors, the report notes, have already restored investor confidence, leading to credit rating upgrades by all three major global agencies between April and August 2025.
The central bank said that stronger fundamentals — including stable prices, improved confidence, and revived business sentiment — have created a solid base for growth in FY26.
Growth to Remain Moderate, Floods Pose Risk
The SBP projects real GDP growth to stay near the lower end of its previous estimate of 3.25 to 4.25 percent. Although lower interest rates and higher development spending are expected to support activity, widespread flooding in Punjab and Khyber Pakhtunkhwa has damaged crops, infrastructure, and supply chains, putting pressure on agriculture.
Crops like rice, cotton, maize, and sugarcane have suffered significant losses, though a strong Rabi season could partially offset the impact.
The report noted that reconstruction work and increased public investment are likely to boost the construction sector and related industries.
Fiscal Deficit to Stay in Check
The SBP expects fiscal consolidation to continue, with the deficit likely between 3.8 and 4.8 percent of GDP. This improvement will be supported by tax reforms and better documentation of the economy.
Lower interest rates will also help sustain consumer demand and private investment, giving industries more room to grow.
Trade and Remittances to Support External Balance
On the external front, exports are forecast between US$32 and 33 billion, while imports are expected to reach US$63 to 65 billion, largely because of higher demand for reconstruction materials and agricultural goods.
Workers’ remittances are projected between US$39 and 40 billion, maintaining the strong momentum from FY25. With these inflows, the SBP expects the current account deficit to stay small — within 0 to 1 percent of GDP — keeping the exchange rate and foreign reserves stable.
Inflation May Rise Temporarily
While inflation dropped to record lows in FY25, the SBP warns it could rise slightly in the second half of FY26 due to adjustments in gas and electricity tariffs.
The bank predicts average consumer inflation between 5 and 7 percent, though food prices might climb temporarily because of flood-related shortages.
However, stable global commodity prices, restrained domestic demand, and manageable external conditions should prevent inflation from spiraling again.
Risks Still on the Horizon
The SBP cautioned that global trade tensions, energy price volatility, and geopolitical uncertainties could pose fresh risks to Pakistan’s stability.
Domestically, the speed and scale of reconstruction after the floods will play a key role in determining how fast the agricultural and infrastructure sectors recover.
Reforms Remain Essential for Long-Term Growth
The report stresses that Pakistan must continue reforms under the IMF’s Extended Fund Facility to protect recent gains. It calls for consistent fiscal discipline, improved governance in public enterprises, and energy-sector restructuring to reduce debt and strengthen resilience.
The SBP said coordination between fiscal and monetary authorities remains crucial to sustaining progress.
A Stronger Starting Point, But Challenges Ahead
The SBP noted that Pakistan begins FY26 in a much stronger position than last year — with better confidence, lower vulnerabilities, and a path toward recovery. But it warned that the real challenge is to protect these gains while addressing deep-rooted structural problems.
The central bank urged policymakers to fast-track reforms in taxation, energy, and agriculture, emphasizing that sustained productivity growth will be key to putting Pakistan’s economy on a more resilient and self-reliant track.
Author Profile
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Farooq Awan is a meticulous finance correspondent focused on Pakistan’s growth engines.
His reporting, driven by State Bank data, details the services sector's resilience and 3% expansion as the primary force behind GDP recovery. Awan highlights the critical role of ICT and stable policy in driving this essential economic digital transformation.
