Pakistan’s Economy Sees Stronger Growth, Lower Inflation as SBP Reports 9-Year Low Fiscal Deficit

Pakistan’s economy showed signs of renewed stability and growth in fiscal year 2024-25, with the State Bank of Pakistan (SBP) reporting a nine-year low in the fiscal deficit and inflation dropping to its lowest level in eight years. The central bank’s annual report, released Thursday, credited prudent monetary policy, continued fiscal consolidation, and favorable global conditions for the improved macroeconomic outlook. According to the SBP, real GDP growth edged higher in FY25, led by the services sector and a rebound in industrial activity, even as key crops and large-scale manufacturing lagged. The expansion in economic activity pushed up imports, but robust growth in workers’ remittances more than offset the wider trade deficit, resulting in a notable current account surplus. This, combined with increased inflows from multilateral and bilateral creditors, helped stabilize the foreign exchange market and boost SBP reserves. The report highlighted that inflation fell sharply from 23.4% in FY24 to 4.5% in FY25, driven by stable food supplies, a steady exchange rate, and lower global commodity prices. The improved inflation outlook and a stronger external account position prompted the Monetary Policy Committee to cut the policy rate by a cumulative 1,100 basis points between June 2024 and June 2025. SBP noted that the government’s fiscal consolidation efforts, along with a significant rise in central bank profits, reduced the fiscal deficit to its lowest level since 2016. The primary balance surplus also exceeded budget estimates for the second consecutive year. Despite these gains, the report warned that structural challenges, including a persistently low savings rate, a large informal economy, and frequent climate shocks, continue to weigh on Pakistan’s long-term growth prospects. The SBP called for concerted policy reforms to address these issues, noting that recent floods have damaged crops and infrastructure, posing risks to the economic outlook. The report also pointed to a revival in business and household confidence, with all three major international credit rating agencies upgrading Pakistan’s ratings between April and August 2025. However, the SBP cautioned that flood-related disruptions could impact agricultural output and supply chains, potentially pushing inflation above the medium-term target range of 5% to 7% in the second half of FY26. Looking ahead, the SBP expects real GDP growth to remain near the lower end of its 3.25% to 4.25% forecast for FY26, with the current account deficit likely to stay within 0% to 1% of GDP. The central bank anticipates that inflation will return to target levels by FY27, provided domestic demand remains contained and global commodity prices stay favorable.