KARACHI: After enduring years of economic turbulence, Pakistan has entered a phase of stabilization, with the State Bank of Pakistan (SBP) and government’s coordinated policies putting the economy on a path to recovery and strengthening its resilience against future shocks.
Monetary Policy Report (MPR) of the SBP, issued on Wednesday, also warns that Pakistan’s economic outlook faces significant risks from global trade tensions, volatile commodity prices, extreme weather, tight financial conditions, and domestic energy price shocks. It stresses the need to maintain prudent policies and accelerate structural reforms to boost productivity, exports, fiscal sustainability and achieve sustainable growth.
The SBP has for the first time released MPR, outlining the major economic developments and macroeconomic outlook that were the main considerations in the recent meetings of the Monetary Policy Committee (MPC).
Pakistan’s economic outlook remains bright: SBP governor
The Report is part of SBP’s continuous communications efforts to increase transparency in monetary policymaking and in more effectively communicating the considerations for policy formulation to relevant stakeholders.
According to the report, Pakistan’s economy has faced years of severe strain from global and domestic shocks, leading to high inflation, widening deficits, depleted reserves, and weak growth. However, due to calibrated policy response by the SBP, supplemented by sustained fiscal consolidation by the government, the economy has stabilized and is now on the path to recovery. “Pakistan is in a better position today to manage external shocks and domestic risks than it was two years ago,” the report said.
With rapidly evolving global developments and heightened global trade uncertainty, 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 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 amidst intensifying US tariff-related uncertainty and relatively moderate global growth prospects.
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. Moreover, 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.
With the policy rate kept unchanged at 11 percent in the MPC meetings in June and July, the MPC expects the real policy rate to be adequately positive to stabilize inflation within the medium-term target range as also evident in the inflation fan chart included in the report.
Moreover, in the external account, the MPR expects the trade deficit to widen further and, not withstanding continued expected growth in workers’ remittances, result in a current account deficit of 0-1 percent of GDP in FY26.
Nonetheless, the MPR observed that the projected financial inflows, coupled with continued SBP interbank FX purchases, would support further buildup in SBP’s FX reserves, which are projected to rise to $15.5 billion by end-December 2025. Meanwhile, economic activity is projected to gain further traction, with the impact of the earlier reductions in the policy rate still unfolding.
As such, real GDP growth is assessed to range between 3.25-4.25 percent in FY26. At the same time, the MPR discussed potential external and domestic risks to the baseline macroeconomic outlook.
The MPR also contains five box items that discuss both important theoretical underpinnings related to monetary policy formulation and communication, as well as topical issues at the global and domestic levels.
The first box contextualizes the 1,100-bps reduction in the policy rate and its still-unfolding impact, as referenced in multiple recent SBP monetary policy statements, with the lag in transmission of monetary policy changes to the economy. The second box provides a holistic summary of recent cautious monetary policy decisions across major central banks in advanced and emerging economies.
The third box provides a handy guide for interpreting fan charts-a common visualization tool used by many central banks to highlight uncertainty around forecasts of key variables, especially inflation. The fourth and fifth boxes detail the use of alternative data and machine learning techniques by the SBP to account for the lag and erratic availability of necessary data related to the labor market and agriculture sector, respectively.
Copyright Business Recorder, 2025
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