Improved Domestic Resilience and External Shock Management Affirmed by State Bank of Pakistan for Pakistan's Economy
Pakistan's Economy Projected for Moderate Growth in Upcoming Fiscal Year
The State Bank of Pakistan (SBP) has published its first-ever biannual Monetary Policy Report (MPR), projecting a moderate growth of 3.25% to 4.25% for the upcoming fiscal year 2025-26. The report, which was published on Wednesday, provides a detailed analysis of the current macroeconomic conditions and outlook, risks to the outlook, and recent considerations in the formulation of monetary policy.
The SBP's primary focus in the recent meetings of the Monetary Policy Committee (MPC) has been on economic development and the macroeconomic outlook. As a result, the policy rate was reduced cumulatively by 1,100 basis points from June 2024 to May 2025, with the rate currently standing at 11%. The policy rate was maintained in meetings held in June and July 2025, with inflation expected to mostly remain between 5% and 7% during the ongoing fiscal year 2025-26.
Foreign exchange reserves are projected to reach around $15.5 billion by end-2025, supported by steady remittance inflows and financial inflows. However, the trade deficit is expected to widen further during FY26, potentially posing risks to external balance.
The MPR highlights that Pakistan's economy is more stable and resilient now, better able to absorb shocks compared to two years ago, due to calibrated SBP policies and government fiscal consolidation. Key risks identified include domestic and external uncertainties that could adversely affect the baseline growth and inflation outlook. These potential risks include volatile international commodity prices, global trade uncertainty, and unanticipated adjustments in domestic administered energy prices.
The SBP emphasized the importance of pursuing structural reforms to supplement monetary policy efforts and to achieve higher growth on a sustainable basis (3.25-4.25% in FY26). The real policy rate is expected to be adequately positive to stabilize inflation within the medium-term target range of 5-7%.
The trade deficit is expected to widen further, resulting in a current account deficit of 0-1% of GDP in FY26. The economic activity is projected to gain further traction, with the impact of the earlier reductions in the policy rate still unfolding, according to the central bank.
It's worth noting that Pakistan received $3.2bn in remittances in July 2025, a positive sign for the country's economy. However, the specific details about the optimism expressed by Finance Minister Aurangzeb about a possible policy rate cut are not provided in the report.
In summary, Pakistan's economy is projected to grow moderately with inflation broadly stable, but heightened vigilance is warranted given external vulnerabilities and widening trade deficits despite improving macroeconomic conditions and policy support.
- The State Bank of Pakistan (SBP) has identified domestic and external uncertainties, such as volatile international commodity prices, global trade uncertainty, and unanticipated adjustments in domestic administered energy prices, as potential risks that could adversely affect the baseline growth and inflation outlook.
- As part of the emphasis on pursuing structural reforms, the SBP highlighted the importance of continuing monetary policy efforts to achieve higher growth on a sustainable basis, with the real policy rate expected to be adequately positive to stabilize inflation within the medium-term target range of 5-7%.
- In an effort to support the country's economy, the SBP has reduced the policy rate cumulatively by 1,100 basis points from June 2024 to May 2025, with the rate currently standing at 11%. Though maintained in meetings held in June and July 2025, there seems to be optimism expressed by the Finance Minister Aurangzeb about a possible policy rate cut, but specific details are not provided in the report.
- Despite improving macroeconomic conditions and policy support, there is still a risk for Pakistan's economy as the SBP has foreseen a widening trade deficit and potential increase in external vulnerabilities in the upcoming fiscal year 2025-26, possibly affecting the modest growth rate.
