Pakistan’s economy is showing tentative signs of stabilization, but the State Bank of Pakistan’s (SBP) latest Annual Report on the State of the Economy for 2024-25 serves as both a pat on the back and a stern warning.
Real GDP growth for the just-ended fiscal year has been revised upward to 3.02 percent from an earlier 2.68 percent estimate, thanks to a robust rebound in the final quarter. Looking ahead to FY26, the SBP projects growth hovering near the lower end of its previous 3.25 to 4.25 percent range, while flagging risks of headline inflation breaching 7 percent in the second half—pushing it above the medium-term target of 5-7 percent. For a nation still scarred by floods, debt pressures, and global trade jitters, these figures capture a fragile recovery where every gain feels hard-won, and setbacks could unravel progress overnight.
The report paints a picture of an economy that defied early pessimism in FY25. Growth accelerated progressively across quarters, culminating in a sharp 5.66 percent expansion in April-June, up from modest 1.8 percent in Q1, 1.94 percent in Q2, and 2.79 percent in Q3. This late surge was fueled by the services sector, which grew 3.72 percent, and a dramatic industrial rebound. Industrial output rocketed 19.9 percent in Q4 after tepid gains earlier—0.3 percent in Q1, 0.2 percent in Q2, and 1.2 percent in Q3—driven largely by value addition in electricity, gas, and water supply, which soared 121.38 percent amid subsidies and a low base effect. Construction also picked up, bolstered by public development spending, though private activity lagged due to soaring input costs and higher property taxes. Small-scale manufacturing chipped in positively, but mining and quarrying contracted for the fourth straight year, highlighting persistent vulnerabilities in resource extraction.
Agriculture, the backbone for 40 percent of Pakistan’s workforce, managed a slim 0.18 percent growth in Q4 despite a 17.55 percent slump in major crops like wheat and cotton, battered by floods and erratic weather. Bright spots included double-digit rises in onions (12.6 percent), mangoes (26.4 percent), and green fodder (14.2 percent), alongside modest gains in livestock (1.44 percent), forestry (3.60 percent), and fishing (2.23 percent). These offsets underscore the sector’s resilience but also its fragility—agriculture contributes a fifth of GDP, yet remains at the mercy of climate whims that recent floods in Punjab and Sindh have only amplified.
For ordinary Pakistanis, the revised 3.02 percent growth might sound like abstract good news, but it’s a lifeline after years of contraction. Yet, the SBP tempers optimism with a call for deep structural reforms to unlock sustainable high growth. Key priorities include boosting savings and investment—Pakistan’s low savings rate hampers both public and private spending—improving resource allocation, and advancing regulatory tweaks to sharpen competitiveness. Without these, the report warns, the economy risks stagnation, trapped in a low-growth trap that erodes jobs and widens inequality.
Looking to FY26, the outlook is cautiously balanced. Increased economic activity and agricultural shortages could swell imports, pressuring the external sector. But tailwinds like lower US tariffs on Pakistani exports and steady remittances—projected to remain robust—should keep the current account deficit (CAD) tame, between 0-1 percent of GDP. Remittances, a quiet hero at $38.3 billion in FY25, surged 26.6 percent last year, cushioning trade gaps and stabilizing the rupee. On the fiscal front, tax reforms and economy-wide documentation efforts, plus a windfall from SBP profit transfers in August 2025, point to a deficit narrowing to 3.8-4.8 percent of GDP. This consolidation, alongside a multi-year low of 5.4 percent in FY25, reflects disciplined policy, but the SBP stresses vigilance against fiscal slippages.
Inflation, however, looms as the biggest shadow. After plummeting to 4.5 percent in FY25—the lowest in eight years, down from 23.4 percent—the report foresees a resurgence. Headline NCPI could top 7 percent in H2 FY26, driven by flood-damaged agriculture and infrastructure, before easing back into the 5-7 percent band in FY27. Upside risks include supply disruptions from climate shocks, while downside threats to growth stem from geopolitical tensions and trade uncertainties, like US tariff hikes that could clip exports by 1.5 percent. Global commodity prices remain subdued, and domestic demand is soft, but the SBP urges a data-dependent monetary stance to anchor expectations. The policy rate, slashed 1,100 basis points from June 2024 to June 2025, has spurred private credit, but sticky core inflation in H2 FY25 prompted a slower easing pace.
Structural cracks in financial intermediation add another layer of concern. High government borrowing—though down to 74 percent of banks’ deficit financing from nearly 100 percent—has crowded out private credit, with banks favoring safe, high-yield government securities. This keeps Pakistan’s credit-to-GDP ratio low compared to peers, stifling savings, investment, and financial deepening. The report calls for reforms to redirect capital toward productive sectors, fostering an environment where businesses can thrive without state dominance.
In a small but symbolic boost, the SBP reported its foreign exchange reserves edging up $21 million to $14.441 billion for the week ending October 10, pushing total liquid reserves to $19.811 billion, including $5.369 billion held by banks. This modest climb, amid an IMF staff-level agreement for a $1.2 billion tranche, signals building buffers against external shocks. Reserves have trended upward since early October, offering about three months of import cover—a far cry from the near-zero days of 2023’s crisis.
For Pakistanis navigating daily life, the SBP report is a mixed ledger. The upward GDP revision and reserve gains evoke relief after a grueling FY25 marked by floods that submerged dreams and livelihoods. Inflation’s potential spike threatens to claw back the wins, hitting the poor hardest in a country where nine in ten scrape by below $4.2 a day. Women, with labor participation at a dismal 21 percent, remain sidelined, squandering potential GDP boosts of 20-30 percent.
The SBP’s message is clear: macroeconomic stability is a foundation, not a finish line. Structural reforms— from climate-resilient agriculture to export diversification beyond textiles—must take center stage. The National Tariff Policy’s cuts could help, but only with logistics and energy fixes. Empowering women through safe transport and skills training, expanding safety nets like Benazir Income Support, and investing in innovation can turn projections into prosperity. As global growth slows to 3.2 percent in 2025 per the IMF, Pakistan can’t afford half-measures. By heeding the call for resilience, it might not just stabilize but soar, ensuring that growth touches every roti on every table.