Pakistan’s economy in 2025 emerged from the phase of acute macroeconomic distress that had defined the preceding two years, but it did so not through a decisive resurgence in investment, exports, or productivity, rather through a prolonged and tightly managed period of compression, externally anchored discipline, and selective structural intervention, leaving the country with visibly improved headline indicators but an underlying growth engine that remained fragile and constrained as it moved toward 2026. After the turbulence of 2022–24, when headline inflation peaked near 38 per cent, foreign exchange reserves fell to critically low levels, sovereign market access narrowed sharply, and policy credibility was repeatedly tested, the year marked a return to administrative and monetary control, underpinned by IMF programme conditionality, restrained fiscal operations, and a deliberately tight monetary stance that prioritised stability over expansion. Real GDP growth recovered into the 2.5–3.0 per cent range according to official and multilateral estimates, sufficient to avert contraction and restore a degree of macro predictability, but materially below the 5–6 per cent trajectory historically required to absorb labour force growth and restore per capita incomes, which on an inflation-adjusted basis remained under pressure due to population expansion and the cumulative erosion of purchasing power. The stabilisation achieved during the year was therefore statistical rather than transformational, reflecting normalisation from a depressed base rather than the reactivation of Pakistan’s long-stalled growth drivers.
The sectoral composition of growth reinforced this assessment and continues to shape expectations as the economy enters 2026. Large-scale manufacturing recorded uneven improvement across the year, with gains concentrated in a limited number of subsectors, while elevated real interest rates, subdued consumer demand, persistent energy pricing distortions, and constrained working-capital conditions suppressed capacity utilisation across much of the industrial base. Private fixed investment remained weak, as firms prioritised liquidity preservation, balance-sheet repair, and debt servicing over capacity expansion, reflecting both the high cost of financing and uncertainty over the durability of demand in a high-tax, high-rate environment. Services accounted for the largest share of incremental growth, but this expansion was dominated by domestically oriented and lower-productivity activities rather than exportable or technology-intensive segments capable of driving structural change or generating foreign exchange. Agriculture delivered only modest growth despite higher formal credit disbursement, constrained by climate volatility, rising fertiliser and fuel costs, water stress, and entrenched productivity gaps that limit output response even in years of relative macro stability. As Pakistan moves into 2026, these sectoral dynamics imply that without a decisive easing in financial conditions or a structural reduction in input costs, growth is likely to remain capped rather than accelerate organically.
Inflation dynamics represented the most visible macroeconomic shift of 2025 and the clearest signal of policy traction. Headline CPI inflation, which had peaked near 38 per cent year-on-year in mid-2023, decelerated sharply through 2024 and into 2025, moving into single digits by mid-year and easing further toward the lower single-digit range by the final quarter, driven by the cumulative impact of tight monetary policy, easing global commodity prices, administrative pricing adjustments, and strong base effects, particularly in food and energy categories. While this disinflation materially reduced macroeconomic risk and stabilised inflation expectations, it did not reverse the cumulative erosion of purchasing power experienced by households during the inflationary surge. Price levels remained elevated relative to incomes, real wages lagged cumulative inflation, and food, fuel, and utility costs continued to absorb a disproportionate share of household expenditure, constraining consumption recovery and reinforcing weak domestic demand despite improved year-on-year inflation readings.
Monetary conditions remained restrictive for most of 2025 and continue to define the opening phase of 2026, reflecting the central bank’s prioritisation of inflation anchoring and external stability over near-term growth impulses. The policy rate was held at elevated levels well into the year, keeping real interest rates positive and credit conditions tight across the economy. Private-sector credit growth remained muted, while banks expanded holdings of government securities, attracted by high risk-free yields and favourable regulatory treatment, reinforcing the crowding-out of productive investment. Although improving inflation dynamics created space for cautious signalling around easing, the pace of monetary relaxation remained deliberate, shaped by concern over premature loosening and its implications for inflation resurgence, capital flows, and reserve adequacy. As a result, the transmission of monetary relief to the real economy remained limited, delaying any meaningful investment recovery.
Fiscal policy followed a similarly constrained trajectory throughout the year. Under IMF programme commitments, the government prioritised consolidation through revenue mobilisation, subsidy rationalisation, and expenditure control, with the FY25–26 budget projecting higher growth while maintaining a contractionary underlying stance. Development spending remained restrained, limiting the state’s ability to deploy counter-cyclical tools or accelerate infrastructure investment, while interest payments continued to absorb a significant share of federal revenues due to elevated debt levels and high domestic borrowing costs. Although headline fiscal indicators improved and programme benchmarks were broadly met, the adjustment burden weighed on domestic demand and reinforced weak growth dynamics, leaving fiscal space narrow as the economy moves forward.
One of the most consequential structural interventions during the year occurred in the power sector. The government renegotiated contracts with Independent Power Producers, projecting cumulative savings of approximately Rs 3.4 trillion over the life of revised agreements, primarily through reductions in capacity payments, changes to indexation mechanisms, and adjustments to guaranteed returns. These savings do not immediately translate into fiscal relief but materially reduce the forward burden on consumers, distribution companies, and the public balance sheet, where power-sector inefficiencies have historically generated persistent quasi-fiscal losses. If realised and enforced, these reforms have the potential to ease inflation pass-through, improve industrial competitiveness, and create limited fiscal breathing space in the years ahead, even as execution and legal durability remain key risks.
The energy and extractives sector also contributed selectively to the stabilisation narrative, though in incremental rather than transformative ways. In upstream oil and gas, a series of small-to-mid-scale discoveries and appraisal successes added marginal volumes to domestic supply, slowing decline rates in mature basins but falling short of materially reducing import dependence. These discoveries nonetheless reinforced the commercial logic of continued upstream activity even under constrained pricing and regulatory regimes. In parallel, renewed momentum in the minerals sector, particularly around large copper and gold projects and associated infrastructure planning, strengthened medium-term expectations for export capacity and foreign exchange earnings, even as long gestation periods, financing complexity, and execution risk limit near-term macro impact.
The stabilisation phase of 2025 also saw a more explicit acknowledgement within the state apparatus of the structural drivers behind Pakistan’s repeated reliance on IMF programmes. In late 2025, the Ministry of Planning, Development and Special Initiatives released a policy framework examining how Pakistan could avoid recurring IMF recourse over the medium term, framing IMF dependence not as a failure of adjustment but as a symptom of unresolved structural imbalances. The document identified chronic current-account fragility, persistent power-sector losses, low tax buoyancy, weak productivity growth, and governance and coordination failures as the primary drivers forcing repeated external adjustment, and argued that without sustained reform in these areas, stabilisation would remain temporary rather than durable.
Within this planning framework, digital transformation of government operations emerged as a quietly central pillar of reform rather than a standalone technology initiative. The expansion of digital systems across taxation, customs, procurement, social transfers, and regulatory approvals was increasingly positioned as a means to broaden the tax base, improve compliance, reduce transaction costs, and limit discretionary bottlenecks that deter investment. The national digital census conducted by the Pakistan Bureau of Statistics provided, for the first time, high-resolution, geo-tagged data capable of informing labour-market planning, enterprise density mapping, urbanisation management, and service-delivery targeting with far greater precision than previously possible. Complementing this shift, the Securities and Exchange Commission of Pakistan reported the registration of more than 14,800 new companies between July and October 2025, reflecting improved digital onboarding, reduced compliance friction, and gradual formalisation rather than a cyclical surge in entrepreneurial activity.
External sector conditions in 2025 showed visible improvement in headline terms, but the underlying structure of Pakistan’s balance of payments remained fragile, narrow, and heavily dependent on compression rather than competitiveness, a distinction that continues to define vulnerability as the economy moves forward. The current account moved toward balance and periodically into surplus over the year, but this adjustment was driven overwhelmingly by suppressed imports rather than export expansion, reflecting weak domestic demand, constrained industrial activity, administrative foreign-exchange management, and elevated interest rates rather than any meaningful shift in trade dynamics. Export growth remained muted, constrained by high energy costs, logistics inefficiencies, limited product diversification, and subdued global demand for traditional Pakistani export categories. In contrast, remittances continued to serve as the single most stabilising external inflow, providing a steady source of foreign exchange that supported household consumption and offset weaknesses in both exports and capital inflows. Foreign-exchange reserves recovered from crisis lows through multilateral disbursements and bilateral inflows, stabilising sentiment and averting near-term stress, but remained thin in absolute terms, covering only a limited number of import months and leaving Pakistan exposed to commodity-price shocks, remittance volatility, and shifts in global financial conditions.
Capital flows and investor sentiment during 2025 reflected selective confidence rather than broad-based conviction, reinforcing the view that stabilisation alone has not yet translated into a durable improvement in Pakistan’s investment climate. Overall foreign direct investment remained modest in aggregate terms, with inflows uneven across months and sectors, underscoring persistent concerns around currency risk, taxation complexity, regulatory unpredictability, and contract enforcement. That said, several transactions and announcements stood out for their signalling value, including UAE participation in Fauji Fertilizer Company, regulatory approval and completion of the PTCL–Telenor Pakistan merger, and incremental foreign commitments in energy, minerals, and digital infrastructure. In addition, multiple international technology firms announced market entry, service launches, or expansion plans in Pakistan, reflecting confidence in the size, connectivity, and digital engagement of the domestic market rather than large capital deployment. At the same time, visible exits and scale-backs by some multinational firms highlighted the persistence of operating-environment risks, reinforcing the fragmented nature of investor confidence.
International credit ratings provided a measured external validation of stabilisation without endorsing a recovery narrative. Moody’s Investors Service, S&P Global and Fitch Ratings maintained Pakistan’s sovereign ratings at deeply speculative levels through 2025, acknowledging reduced near-term default risk following programme compliance and reserve rebuilding, while continuing to flag vulnerabilities related to external financing dependence, elevated public debt, weak revenue mobilisation, and institutional capacity constraints. While outlooks stabilised relative to earlier periods of acute stress and agencies recognised improvements in inflation control and fiscal discipline, both stopped short of signalling any durable improvement in credit fundamentals, reinforcing that Pakistan’s re-entry into market-based financing remains contingent on sustained reform delivery rather than cyclical stabilisation.
Governance reform remained the binding constraint across all sectors of the economy. Diagnostics from the International Monetary Fund continued to link Pakistan’s weak growth performance to institutional inefficiencies, regulatory fragmentation, and corruption, noting that such failures can impose GDP losses amounting to several percentage points annually in economies with comparable profiles. In Pakistan’s case, these losses manifest through persistent revenue shortfalls, power-sector inefficiencies, subdued capital formation, and weak productivity growth, reinforcing the reality that macro stabilisation without institutional reform will not deliver sustained economic expansion.
Looking ahead, 2026 will test whether Pakistan can operate outside the logic of crisis management that has long defined its economic cycle. The question is no longer whether the state can suppress volatility under external constraint, but whether its planning, regulatory, and execution capacity can function when reform choices carry political cost and require institutional discipline. The availability of granular economic intelligence—from the digital census to integrated tax, customs, and corporate registries—creates the technical possibility of more disciplined allocation; whether that possibility is realised will depend on authority and continuity rather than technology alone. If 2025 was the year the economy stopped deteriorating, 2026 will determine whether it can function normally without the pressure of imminent crisis.
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