The State Bank of Pakistan (SBP) has projected real GDP growth at approximately 3.25% for fiscal year 2025-26 (FY26), reflecting a modest expansion at the lower end of its earlier estimates. The central bank, however, cautioned that headline inflation could breach 7% in the second half of the fiscal year, exceeding the medium-term target range of 5-7%, highlighting persistent macroeconomic risks.
In its Annual Report on the State of Pakistan’s Economy 2024-25, released on Thursday, the SBP observed that while industrial activity showed a partial recovery in FY25, structural and cyclical vulnerabilities remain. The report revised GDP growth for FY25 to 3.02%, up from an earlier estimate of 2.68%, following a sharp rebound in the fourth quarter. Industrial output surged by 19.9% in Q4, after growing marginally in the first three quarters—0.3% in Q1, 0.2% in Q2, and 1.2% in Q3—primarily driven by value addition in electricity, gas, water supply, and construction. Small-scale manufacturing also contributed to growth, although mining and quarrying continued to contract for the fourth consecutive year.
The SBP emphasized the need for structural reforms to ensure sustainable economic growth. It identified critical areas for improvement, including encouraging savings and investment, better allocation of resources, and enhancing institutional and regulatory frameworks to boost competitiveness and economic resilience.
The report also flagged the twin challenges of fiscal and external pressures. Increased economic activity, coupled with expected agricultural shortages, may raise import bills in FY26. However, the central bank expects lower U.S. tariffs on Pakistani exports and sustained remittance inflows to partially offset the current account deficit, which it projected at 0-1% of GDP.
On the fiscal front, continued tax reforms and improved documentation of economic activity are expected to strengthen revenue mobilisation. The transfer of SBP profits in August 2025 is also expected to provide additional fiscal support, helping the government maintain the fiscal deficit within 3.8-4.8% of GDP in FY26.
Despite relatively stable global commodity prices and subdued domestic demand, inflationary pressures remain a concern. The SBP warned that headline NCPI inflation could temporarily exceed the medium-term target range in H2-FY26 due to flood-related agricultural and infrastructure damage. Downside risks to growth were also noted, stemming from geopolitical uncertainties and global trade volatility.
Financial intermediation continues to reflect structural weaknesses. Elevated government borrowing has crowded out private sector credit, as banks prefer investing in government securities due to their high returns and low risk. This dynamic contributes to Pakistan’s low credit-to-GDP ratio compared to peer economies, restricting private investment and savings mobilisation.
Private construction activity remained muted, constrained by rising input costs and higher property taxes, even as public sector development spending supported infrastructure projects.
On the external sector, the SBP reported a $21 million increase in foreign exchange reserves during the week ended October 10, 2025, bringing total reserves to $14.441 billion. Including reserves held by commercial banks, total liquid foreign exchange reserves stood at $19.811 billion.
The report underscores that while FY26 is expected to see modest growth, careful policy management, structural reforms, and resilience against external shocks will be essential to sustain economic recovery and macroeconomic stability in Pakistan.
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