Economic scenario commendably praised by SBP
Pakistan's Economy on the Recovery Path, but Faces Significant Risks
The State Bank of Pakistan (SBP) has issued its first Monetary Policy Report (MPR), outlining major economic developments and the country's macroeconomic outlook. According to the report, due to calibrated policy response by the SBP and sustained fiscal consolidation by the government, Pakistan's economy has stabilized and is now on the path to recovery.
The economy is projected to gain further traction, with real GDP growth assessed to range between 3.25-4.25 percent in FY26. The policy rate remains unchanged at 11 percent in the MPC meetings in June and July. However, the trade deficit is expected to widen further and result in a current account deficit of 0 to 1 percent of GDP in FY26.
The MPR stresses that these risks require continued prudent monetary and fiscal policy, along with wide-ranging structural reforms to sustain macroeconomic stability. The report highlights several significant risks to Pakistan's economic outlook, including global economic uncertainty, volatility in global commodity prices, domestic risks from heavy rainfalls and flooding, tight global financial conditions, and unanticipated changes in administered energy prices.
Global economic uncertainty mainly due to trade-related tariff developments could disrupt external demand and trade flows. Volatility in global commodity prices, especially energy and food, can negatively impact inflation and the external account. Domestic risks from heavy rainfalls and flooding may increase prices of perishable food items, thereby pushing up inflation in the near term. Tight global financial conditions could limit access to external financing and affect domestic economic activity. Unanticipated changes in administered energy prices have implications for inflation and overall economic performance.
To navigate the evolving risks and challenges, it is essential that the ongoing prudent monetary and fiscal policy stance be sustained to ensure ongoing overall macroeconomic stability. Workers' remittances are expected to continue growing, but may not offset the widening trade deficit. The MPC expects the real policy rate to be adequately positive to stabilize inflation within the medium-term target range.
The export outlook is clouded by subdued global prices of Pakistan's key exports (rice and cotton), and relatively weaker prospects for major high value-added (HVA) textile items. SBP's FX reserves are projected to rise to $15.5 billion by end-December 2025, due to projected financial inflows and continued SBP interbank FX purchases.
The SBP governor states that Pakistan's economic outlook remains bright. To put the economy on a trajectory of higher, sustainable, and inclusive growth, there is a need to undertake wide-ranging structural reforms. Some progress is already being made by the government and other relevant stakeholders, including the SBP, to introduce reforms in these areas.
The MPR contains five box items that discuss monetary policy formulation and communication, as well as topical issues at the global and domestic levels. The report indicates that Pakistan's economy has faced years of severe strain from global and domestic shocks. The MPC expects the real policy rate to be adequately positive to stabilize inflation within the medium-term target range.
In summary, Pakistan’s economic outlook faces significant risks from external uncertainties, commodity price swings, and domestic climate events, requiring careful policy management to maintain stability and growth. However, with continued prudent policy and structural reforms, the country's economy remains on a path to recovery and sustainable growth.
[1] Source: State Bank of Pakistan Monetary Policy Report, FY26 [2] Source: Pakistan Economic Survey, FY 2024-25 [3] Source: Pakistan Bureau of Statistics, Inflation Report, FY 2024-25 [4] Source: Moody's Investors Service, Sovereign Credit Rating Report, June 2025 [5] Source: International Monetary Fund, Pakistan's Extended Fund Facility Programme, June 2025
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