Pakistan’s economy has shown signs of recovery after facing significant challenges during the 2022-23 downturn. Recent reports highlight modest GDP growth, declining inflation, and improvements in foreign exchange reserves, supported by structural reforms and financial assistance from the International Monetary Fund (IMF). While these developments indicate progress, risks such as geopolitical tensions, climate shocks, and debt pressures remain significant.

Pakistan’s economy is gradually recovering from the challenges faced during the 2022-23 downturn. According to the latest United Nations economic survey, the country is expected to see modest growth, with GDP projected to expand by 3.4% in FY25. The World Economic Situation and Prospects 2025 report, published by the United Nations Department of Economic and Social Affairs (DESA), highlights Pakistan’s ongoing efforts under the International Monetary Fund’s (IMF) 37-month Extended Fund Facility (EFF) worth $7 billion. Building on the progress of the 2023 EFF, this program focuses on long-term structural reforms to stabilize the economy and promote sustainable growth.

The EFF aims to help Pakistan address structural challenges, rebuild economic stability, and support key reforms. These include improving policy credibility, enhancing competitiveness, reforming state-owned enterprises, and building resilience to climate change. South Asia’s economic outlook remains promising, with the region expected to experience robust growth. Regional GDP, which grew by 5.9% in 2024, is forecasted to rise by 5.7% in 2025 and 6% in 2026, driven by India’s strong economic performance and recovery in countries like Bhutan, Nepal, Pakistan, and Sri Lanka. In Pakistan, GDP grew by 0.92% in the first quarter of FY2024-25, despite a 1.03% contraction in the industrial sector. Growth was supported by positive contributions from agriculture (1.15%) and services (1.43%), according to the National Accounts Committee (NAC). The committee revised the annual GDP growth rate for FY2023-24 to 2.50%, slightly lower than the previously reported 2.52%. The Asian Development Bank (ADB) also updated its growth forecast for Pakistan, projecting 3.0% growth for FY2024-25, up from its earlier estimate of 2.8% in September 2024.

However, risks to the economic outlook remain. These include potential geopolitical tensions, slowing external demand, persistent debt challenges, and social unrest. Additionally, South Asia’s vulnerability to climate hazards and extreme weather events poses significant risks to the region’s economies.

Inflation across South Asia is expected to decline, falling from an estimated 9.9% in 2024 to 8.3% in 2025 and 7.2% in 2026. While inflation has decreased in most South Asian countries, Bangladesh remains an exception. In Pakistan, inflation saw a notable drop, declining to 1.8% year-on-year for the week ending January 9, compared to 3.97% the previous week. Across the region, inflation rates for 2025 are expected to vary widely, ranging from 3.1% in Sri Lanka to 28.4% in Iran.

Inflation in Pakistan has reached its lowest level since October 2014, a dramatic improvement from the record high of 48.35% in May 2023, as reported by the Pakistan Bureau of Statistics (PBS). Independent economists attribute this decline primarily to the high base effect. Despite the improved figures, many consumers still struggle with the rising cost of living. Across the region, easing inflationary pressures have allowed central banks to either halt monetary tightening or cut policy rates in 2024. Both Pakistan and Sri Lanka have reduced their key policy rates to support economic recovery.

Pakistan’s total foreign exchange reserves have also reached a three-year high, standing at $18.7 billion as of November 2024. This figure includes $5.5 billion in gold reserves, nearing record levels due to rising gold prices. Of the liquid reserves, $4.7 billion is held with commercial banks, separate from the central bank’s holdings. This significant improvement provides much-needed stability to the country’s external account.

Worker remittances have shown remarkable growth as well. In December 2024, remittances recorded an inflow of $3.1 billion, reflecting a year-on-year increase of 29.3% and a month-on-month rise of 5.6%, according to the State Bank of Pakistan (SBP). Cumulatively, remittances during the first half of FY25 (H1FY25) reached $17.8 billion, a substantial 32.8% increase compared to $13.4 billion in H1FY24.

However, South Asia faced significant climate-related challenges in 2024. Heatwaves, droughts, and irregular rainfall in countries such as Bangladesh, India, Pakistan, and Sri Lanka led to reduced crop yields and elevated food prices. Poor rural households were particularly affected, experiencing income reductions and widening income inequality due to these extreme weather events.

Additionally, interest payments have surged across the region since the pandemic, especially in countries with high debt burdens such as the Maldives, Pakistan, and Sri Lanka. Rising debt-servicing costs continue to weigh heavily on their economies.

Pakistan’s economic recovery is a testament to ongoing structural reforms, improved remittance inflows, and declining inflation. The rebound in foreign exchange reserves and easing monetary policies further highlight the progress achieved. However, challenges such as climate-related disruptions, social inequality, and rising interest payments underscore the need for continued policy reforms and resilience-building measures. By addressing these vulnerabilities and fostering sustainable growth, Pakistan can strengthen its economic foundation and achieve long-term stability.