Pakistan’s fragile economic foundation faces mounting pressure as persistent fiscal imbalances, weak productivity, and climate-driven shocks continue to undermine its ability to sustain long-term growth. In its Annual Report on the State of the Economy 2024-25, the State Bank of Pakistan (SBP) has outlined a sobering assessment of the country’s macroeconomic vulnerabilities, warning that without structural reforms, stability may remain short-lived.
The central bank projects GDP growth for FY26 at 3.25 to 4.25 percent, near the lower bound of its forecast range. Inflation is expected to hover between 5 and 7 percent, while the current account deficit is projected at 0 to 1 percent of GDP, reflecting moderate external stability. However, the SBP cautions that these gains are fragile. High energy costs, global trade uncertainty, and flood-induced agricultural losses could disrupt growth momentum and reverse early signs of recovery.
The recent floods in Punjab and Khyber Pakhtunkhwa submerged vast tracts of farmland, severely damaging kharif crops including rice, cotton, maize, and sugarcane. The resulting supply chain disruptions are expected to drive inflationary pressures and restrict raw material availability for agro-based industries. At the same time, increased reconstruction expenditures, while growth-supportive, threaten to strain fiscal resources already burdened by debt repayments.
The SBP identifies low domestic savings as one of Pakistan’s most entrenched weaknesses. Over the past two decades, gross domestic savings have declined to some of the lowest levels among comparable economies. High inflation, weak financial intermediation, and low per capita income have eroded the capacity to save, leaving the economy heavily dependent on consumption. Nearly 92 percent of GDP is driven by consumption, a model sustained by foreign borrowing and remittances rather than productive investment.
This imbalance has deepened the savings-investment gap, fueling a debt spiral where revenues are barely sufficient to meet current expenditures. Interest payments have consistently outpaced development spending, leaving minimal fiscal space for critical investments in health, education, and infrastructure.
Structural inefficiencies within state-owned enterprises continue to drain the national exchequer, while the financial system struggles to channel savings into private investment. Heavy government borrowing has constrained the banking sector’s ability to support businesses, and shallow capital markets with limited investor participation further undermine growth. Despite past efforts to reform the Pakistan Stock Exchange, it remains dominated by a few large players, dampening investor confidence.
A large portion of the population remains outside the formal financial system. Informal savings through gold, real estate, livestock, and rotating savings committees often substitute for institutional mechanisms like insurance and pensions. Religious reservations about interest-based banking and low financial literacy amplify this exclusion, with an estimated 35 percent of respondents in the SBP’s 2025 survey preferring informal savings channels.
As a result, Pakistan’s financial depth, measured through private sector credit and deposit-to-GDP ratios, trails behind regional peers such as Malaysia, Turkey, and Bangladesh. The SBP warns that unless financial inclusion and capital market development accelerate, domestic savings will remain insufficient to support sustained growth.
The country’s vulnerabilities extend beyond fiscal and financial systems. The SBP underscores the urgent need to diversify industrial capacity by investing in petrochemicals, mining, and renewable energy. Pakistan’s dependence on imported industrial inputs and fossil fuels leaves it exposed to external shocks, exchange rate volatility, and persistent balance-of-payments pressures.
Agricultural productivity, hindered by outdated irrigation systems and climate risks, is another critical concern. Modern water management, construction of small and medium-sized dams, and development of climate-resilient crops are essential to safeguarding food security and mitigating future disaster impacts.
Trade competitiveness remains constrained by non-tariff barriers, limited product diversification, and reliance on low-value textile exports. While recent reforms to reduce anti-export bias have made progress, the SBP urges broader regulatory and logistical reforms to attract foreign investment and integrate domestic industries into global value chains.
The report also draws a link between economic stagnation and social challenges. With around 65 percent of the population under 30, Pakistan faces rising youth dependency and weak job creation, both of which fuel consumption-driven growth rather than productive investment. Persistent poverty, hovering at 44 percent, coupled with low investment in education and health, continues to suppress productivity and savings potential.
The SBP stresses that human capital development must be prioritized to shift from a consumption-driven to a knowledge-based economy. Without investments in technology, vocational training, and innovation, Pakistan risks falling further behind regional competitors that have successfully modernized their economies.
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